Amid a treacherous economic backdrop, the Bank of Canada is getting ready for an important moment of truth on interest rates. Tiff Macklem, the Governor of the Bank of Canada, faces an impossible dilemma. Andrew DiCapua, a principal economist at the Canadian Chamber of Commerce, has called it a “mission impossible” given the country’s high unemployment and declining manufacturing base. As uncertainty looms, the central bank will pause issuing formal forecasts until it understands how recent tariff threats may impact the economy.
It was a rough month for Canada’s labor market. The trade-sensitive goods producing sector took the hardest hit though, with nearly 4,000 works disappearing in the manufacturing sector—roughly 31,000 jobs. As a result, the unemployment rate rose two ticks to 6.9 percent. Through these workforce changes, we can see larger trends in our economy. Economists are quickly calling for some caution in making any moves on interest rates.
Macklem’s goal, presumably, will be to thread the needle between continuing to tame inflation and not completely stalling economic growth. April’s inflation report made clear that, despite a rosy headline, underlying price pressures were heading in the wrong direction. Even with a slowing economy usually moderating inflation—which hasn’t happened yet—prices keep going up. “The data that we are seeing come in, especially through the labour market … is going to move the Canadian economy into a very weak position that should keep prices at bay,” noted DiCapua.
The backdrop includes President Donald Trump’s announcement to double existing tariffs on steel and aluminum imports to the United States, which could further complicate Canada’s economic landscape. Nearly all economists now anticipate the central bank to pause interest rate hikes again at its next decision. When it comes to future rate increases, their opinions are not aligned.
Doug Porter, chief economist at BMO, noted that the latest GDP numbers are simply not pointing toward a recession in 2025 — at least, not yet. He warned that the Bank of Canada needs to prepare to cut rates. Failing to do so, it risks sending a clear signal to businesses and consumers that it is not in their corner. Further cuts are needed. That’s the argument made by Stephen Brown, the deputy chief North America economist at Capital Economics. His analysis indicates perfect economic conditions to make this shift. Brown stated, “Our view at Capital Economics is that it’s worth cutting again in June as insurance against those downside risks and try and protect the economy a bit.”
Market turmoil could have graver consequences In truth, unsurprisingly, economists are braced for a much more serious market shake-up to lurch the central bank into action. DiCapua emphasized this sentiment by stating, “They’re really waiting for a shoe to drop, so to speak.” He highlighted the difficult position the Bank of Canada finds itself in: balancing its inflation-taming mandate with the need to support economic stability.
If the economy continues on its present trajectory, monetary policy would warrant lowering the policy rate to two percent before year-end. As Avery Shenfeld, chief economist at CIBC Capital Markets, noted, no single interest rate move can be fatal. Yet if rates hold where they are, with no cuts, businesses and consumers start to get concerned. “If the bank doesn’t cut here, because they’re still very concerned about inflation, that’s telling businesses and consumers that the bank doesn’t necessarily have their back,” Brown added.
Further, the Bank of Canada still predicted a jolt of economic activity in the first quarter of 2023, for what it’s worth. Unlike previous months, they expect the same going forward. The central bank is under unprecedented pressure to take drastic measures. The Fed has a dual mandate, after all—it needs to have an eye on potential risks and on inflation.
In every economic indicator, Canada finds itself at a critical juncture. Inflationary pressures are building and labor market data is an early indication of pain. As economists, we think the time is right to think ahead and act early. Andrew DiCapua urged the need for timely action: “The bank really is in a difficult position here, but they really should be resuming rate cuts to get their interest rates lower to somewhere around two percent again, to cushion the Canadian economy for what’s to come.”
