Merz: We Are Not Prepared To Accept A Deterioration Of Trade Deal

Good morning. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today’s monetary policy decision. Today, Governing Council maintained the policy interest rate at 2.25%. Our forecast for economic growth and inflation in Canada has not changed significantly since our October projection. As the Canadian economy continues to adjust to US trade restrictions, we expect GDP to grow modestly and inflation to stay close to the 2% target. However, uncertainty around our forecast is heightened, and the range of possible outcomes is wider than usual. US trade policy remains unpredictable, and geopolitical risks are elevated. Our monetary policy decisions are focused on keeping inflation close to the 2% target while helping the economy through this period of structural change. Governing Council judges the current policy rate remains appropriate, conditional on the economy evolving broadly in line with the outlook we published today. With heightened uncertainty, we are monitoring risks closely. If the outlook changes, we are prepared to respond. Let me expand on what we’ve seen in the economy since we published our October Monetary Policy Report, and what we see ahead. BANK OF CANADA GOVERNOR TIFF MACKLEM SAYS ELEVATED UNCERTAINTY MAKES IT HARD TO PREDICT TIMING OR DIRECTION OF NEXT RATE CHANGE MACKLEM: TOO EARLY TO TELL HOW WELL CANADIAN ECONOMY WILL ADJUST TO TARIFFS AND ONGOING UNCERTAINTY MACKLEM SAYS UNCERTAINTY AROUND THIS OUTLOOK IS UNUSUALLY HIGH; RANGE OF POSSIBLE OUTCOMES IS WIDER THAN USUAL

US tariffs and the unpredictability of future trade arrangements are disrupting the Canadian economy. Growth in Canada is expected to remain modest, while inflation stays close to 2%. The Canadian economic outlook is little changed since the October Report. Canada continues to adjust to a new trade landscape. Affected businesses are reconfiguring their trade and seeking new suppliers and markets. As this adjustment proceeds, capital will start being reallocated and some workers will shift into new roles. This adjustment will take time, and growth will be restrained through the transition. Uncertainty remains high. The world is becoming more fragmented, and geopolitical risks are elevated. For Canada, the future of trade in North America is an important uncertainty (see In Focus: The review of the Canada-United States-Mexico Agreement). Summary of economic conditions The Canadian economy continues to evolve much as expected, although quarterly growth patterns have been quite volatile. Much of this volatility has been driven by large swings in trade and inventories. After expanding rapidly in the third quarter of 2025, growth likely stalled in the fourth quarter. Growth over the second half of 2025 is estimated to have averaged about 1¼%. Gross domestic product is expected to rise by 1.1% in 2026 and 1.5% in 2027. The pace of expansion is modest due Just in | Bank of Canada projects potential output growth at 1.0% for both 2026 and 2027, with the latter revised down from 1.3%. Breaking | Bank of Canada projects 2025 growth at 1.7%, an increase from the previous estimate of 1.2% in October. Just in | Bank of Canada revises 2026 inflation forecast to 2.0%, slightly down from October's 2.1%, while maintaining a 2.1% outlook for 2027.

The Bank of Canada today held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%. The outlook for the global and Canadian economies is little changed relative to the projection in the October Monetary Policy Report (MPR). However, the outlook is vulnerable to unpredictable US trade policies and geopolitical risks. Economic growth in the United States continues to outpace expectations and is projected to remain solid, driven by AI-related investment and consumer spending. Tariffs are pushing up US inflation, although their effect is expected to fade gradually later this year. In the euro area, growth has been supported by activity in service sectors and will get additional support from fiscal policy. China’s GDP growth is expected to slow gradually, as weakening domestic demand offsets strength in exports. Overall, the Bank expects global growth to average about 3% over the projection horizon. Global financial conditions have remained accommodative overall. Recent weakness in the US dollar has pushed the Canadian dollar above 72 cents, roughly where it had been since the October MPR. Oil prices have been fluctuating in response to geopolitical events and, going forward, are assumed to be slightly below the levels in the October report. BOC: UNCERTAINTY IS HEIGHTENED AND WE ARE MONITORING RISKS CLOSELY; IF OUTLOOK CHANGES WE ARE PREPARED TO RESPOND - KEY SOURCE OF UNCERTAINTY IS REVIEW OF USMCA TRADE DEAL BOC: OUTLOOK HAS CHANGED LITTLE SINCE OCTOBER, BUT IT IS VULNERABLE TO UNPREDICTABLE U.S. TRADE POLICIES AND GEOPOLITICAL RISKS - SAYS IT EXPECTS INFLATION TO STAY CLOSE TO 2% TARGET OVER THE PROJECTION PERIOD BOC: U.S. GROWTH PROJECTED TO REMAIN SOLID, DRIVEN BY AI-RELATED INVESTMENT AND CONSUMER SPENDING - REITERATES THAT CURRENT RATE IS APPROPRIATE, CONDITIONAL WITH ECONOMY EVOLVING BROADLY IN LINE WITH FORECASTS BOC: EFFECTS OF TARIFFS ON U.S. INFLATION EXPECTED TO FADE GRADUALLY LATER THIS YEAR