BoC holds key rate at 2.25% as CUSMA review adds economic uncertainty

Governor of the Bank of Canada Tiff Macklem had much more to say about how things could change, as the review of CUSMA plays out this summer.

He made comments as the Bank of Canada announced Wednesday it is holding its key interest rate steady at 2.25 per cent for a second consecutive time.

“The range of possible outcomes is wider than usual, U.S. trade policy remains unpredictable and geopolitical risks are elevated,” said Macklem.

Speaking to the media Wednesday, Macklem pointed to the upcoming review of the Canada-United States-Mexico (CUSMA) agreement on trade as a key source of economic uncertainty looking forward.

“It’s pretty clear that the days of open rules-based trade with the U.S. are over,” said Macklem. “We need to get on and adjust to that.”

Colin Mang, an assistant professor of economics at McMaster University, says the Bank of Canada will be hesitant to make any interest rate changes until there is a clear picture of where the Canadian economy is going.

With CUSMA being one of those unclear factors.

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“Unfortunately, that’s gonna continue at least through the summer, until we get a little more clarity about what the trade relationship is going to look like,” said Mang. “If things go really badly we could see the bank of Canada making further interest rate movements, otherwise we are unlikely to see any interest rate movements this year.”

For now, the central bank says current economic projections are based on a scenario, in which U.S. tariffs against Canada remain in place and CUSMA-related exemptions maintain some free trade with the U.S.

Meanwhile, it says it expects modest GDP gains and that the inflation rate will stay close to its 2 per cent target.

Employment has also risen in recent months.

“Still, the unemployment rate remains high at 6.8 per cent,” said Macklem. “Youth unemployment is particularly elevated and relatively few businesses say they plan to hire more workers in coming months.”

Overall, the bank says right now the current interest rate remains appropriate and experts agree with that assessment, saying it’s too early to tell what effect the future state of trade with our neighbours will have.

WATCH MORE: Bank of Canada holds key interest rate at 2.25%