Trevor Galon
April 16, 2025
In a move that underscores the delicate balancing act faced by policymakers, the Bank of Canada (BoC) announced today, April 16, 2025, that it will maintain its benchmark interest rate at 2.75%. This decision marks a pause after seven consecutive rate cuts, reflecting the central bank's cautious approach in the face of mounting global economic uncertainties.
Governor Tiff Macklem emphasized the heightened uncertainty stemming from recent U.S. protectionist trade measures. While Canada's economy showed strength at the end of 2024, with inflation near the 2% target and increased household spending, the introduction of new U.S. tariffs has disrupted markets and elevated inflation expectations. Inflation rose to 2.3% in March, influenced by higher goods prices and a weakened Canadian dollar. However, it's anticipated to decline to approximately 1.5% in April, aided by the removal of the consumer carbon tax and decreasing global oil prices.
The BoC's decision reflects its commitment to price stability while navigating the challenges posed by international trade tensions. The central bank outlined two scenarios in its Monetary Policy Report: one where tariffs are resolved, and another predicting a prolonged trade war with significant economic repercussions. The latter scenario includes a four-quarter recession where unemployment rises, GDP growth turns negative and inflation dips before increasing in 2026 due to tariff related price pressures. Given the two-scenario outlook, the bank remains prepared to act decisively based on how these external factors evolve.
Financial markets responded to the announcement with the Canadian dollar appreciating by 0.6% to 1.3875 per U.S. dollar (0.72 U.S. dollar per Canadian dollar). This uptick was supported by the BoC's pause in rate cuts and a broader decline in the U.S. dollar. Investors are now estimating a 50% chance of another rate cut at the BoC's next meeting on June 4, with two more projected by the end of the year.
From an Asset and Portfolio Management Perspective
Within Matco’s Diversified Income Fund, we’ve recently reduced the portfolio’s duration—its sensitivity to interest rate changes. While we still anticipate further BoC rate cuts, the inflationary uncertainty tied to tariffs introduces upward pressure on longer-term yields. This divergence between short- and long-term rates has led us to increase the concentration of our interest rate exposure in the 2- to 7-year part of the curve.
Earlier this year, we were overweight long-term bonds, which benefited the portfolio as yields moved lower. Now, we’re locking in those gains and adjusting positioning to reflect today’s evolving rate dynamics.
From a Wealth Management Perspective
For those with U.S.-Canadian exchange rate considerations, we do anticipate the Canadian dollar to be range bound between 0.70 and 0.75. For those with Canadian mortgage renewal considerations, we anticipate variable rates and offered fixed rates to continue to decline, albeit it gradually.
As the BoC continues to monitor economic developments, today's decision highlights the complexities of monetary policy in an interconnected global economy. The central bank's cautious stance aims to support economic growth while mitigating inflationary pressures amid ongoing trade uncertainties.
