Can the Bank of Canada Save the Economy Without Fueling Inflation?
As the Bank of Canada prepares for a high-stakes interest rate decision this Wednesday, Governor Tiff Macklem finds himself in a scenario that some economists liken to a financial “Mission Impossible.” With inflation concerns re-emerging and global trade tensions escalating — particularly from the United States — the central bank is navigating a precarious path as it tries to keep the Canadian economy afloat.
At the heart of the dilemma is a growing divergence in economic signals. On one hand, Canada’s economy appears to be holding steady, with recent data from Statistics Canada showing a surprising 2.2% annualized GDP growth in the first quarter. On the other hand, underlying indicators — especially in manufacturing and employment — hint at a slowdown that could deepen as new U.S. tariffs take hold.
Andrew DiCapua of the Canadian Chamber of Commerce described the situation as “mission impossible,” noting the tension between rising inflation and weakening economic fundamentals. He believes the Bank should resume rate cuts to buffer the economy against the downturn he sees looming.
The central bank’s benchmark interest rate currently sits at 2.75%, after a pause in April ended a string of seven consecutive rate cuts. Most economists expect Macklem to hold rates steady again this week, especially given stronger-than-expected growth figures. However, many argue the Bank is holding back out of necessity, waiting for more clarity as volatile global trade conditions — particularly U.S. President Donald Trump’s surprise announcement to double tariffs on steel and aluminum — threaten to derail forecasts.
Macklem, speaking last month at the G7 Finance Ministers’ Summit in Alberta, acknowledged that economic activity had temporarily spiked as businesses rushed to front-load exports and stockpile inventory ahead of anticipated tariffs. But he warned that growth in the months ahead would likely be much weaker.
Labour market data already shows signs of strain. April’s job figures revealed a contraction of over 31,000 jobs in the manufacturing sector and a rise in unemployment to 6.9%. And while a slowing economy typically cools inflation, April’s inflation report instead showed price pressures heating up — putting the Bank in a tough spot.
Cutting interest rates now could encourage spending and investment, softening the economic blow, but it risks fueling the very inflation the Bank is mandated to control. Holding steady might reinforce inflation-fighting credibility but could also discourage economic activity and deepen a potential downturn.
Capital Economics’ Stephen Brown sees enough risk ahead to justify action now. He expects the Bank to cut rates in June and continue easing gradually until rates reach 2% by year-end. A June cut, he argued, could have a psychological benefit — signaling that the central bank is responsive and supportive, which could prevent consumers and businesses from pulling back in fear.
Yet others are urging caution. CIBC chief economist Avery Shenfeld is among those calling for a rate hold this week, suggesting there’s no irreversible decision to be made now — but warning that if the economy remains soft, the pressure to cut will intensify soon.
For now, Macklem and the Bank of Canada appear to be buying time, watching the economy for cracks while trying not to blink too soon. But with inflation still lurking and growth possibly built on shaky ground, the longer they wait, the louder the clock ticks.