The Bank of Canada is signaling a strategic shift in its approach to setting its policy rate, as it grapples with the economic uncertainty brought about by ongoing tariff issues. Currently, the policy rate sits at 2.75 percent after a series of seven consecutive cuts. In a speech delivered in Calgary on Thursday, Governor Tiff Macklem outlined the challenges posed by the tariff situation and emphasized the need for adaptability.
Macklem highlighted that the damage caused by tariff uncertainty has already begun to affect both sides of the border. He stressed the importance for Canadians to have confidence in the Bank’s ability to maintain price stability over time, even amid significant economic upheaval.
“The damage caused by tariff uncertainty has started on both sides of the border,” Macklem stated during his address.
The central bank has prepared multiple scenarios to address the potential impacts of tariffs. Macklem noted that it remains unclear how quickly businesses will pass on the higher costs of tariffs to consumers. He emphasized that the Bank of Canada must remain "flexible and adaptable" to react swiftly to new developments regarding tariffs.
“We cannot resolve trade uncertainty, but there can be no doubt about our commitment to low inflation. Canadians need to have confidence that we will maintain price stability over time, even during periods of great upheaval,” Macklem assured.
Despite the challenges posed by tariffs, Macklem acknowledged that the Canadian economy was in a strong position at the start of 2025. Inflation was under control, and economic growth was picking up, indicating that the country had managed a soft landing. The Bank's January projections estimated inflation averaging 2.1 percent through 2026, prior to considering the impact of tariffs.
Macklem warned that the Bank’s toolbox is not ideally suited to simultaneously tackle higher inflation and the economic hit from a tariff conflict. One scenario suggests that broad tariffs could lead to costs being rapidly passed through within a year, potentially causing inflation to rise roughly 2.25 percentage points higher in the first quarter of 2026.
“That means being less forward-looking than normal until the situation is clearer. And it may mean acting quickly when things crystallize,” Macklem explained.
To navigate these complexities, Macklem stated that the Bank would focus on setting a policy rate that better accommodates the range of risks facing Canada. This approach marks a departure from strictly adhering to an economic forecast and adjusting monetary policy accordingly.
