The head of the Bank of Canada shows a change in how central banks set benchmark interest rates when tariff uncertainties with the US make long-term forecasts much more difficult.
Gov. Tiff McClem was in Calgary on Thursday. He spoke to the city’s economic development group.
The Canadian economy was in a strong position at the beginning of 2025, with inflation being controlled and growth recovering, making it ready to speak.
Canada seemed able to avoid a recession as central bank benchmark rates quickly returned to low levels.
“The Canadian economy managed soft landings. Unfortunately, we are not going to stay at Tarmac for a long time,” McClem said.
This is primarily due to Canada’s response to clean up tariffs imposed by the US earlier this month and to impose import taxes on billions of dollars on US goods.
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“The damage caused by tariff uncertainty begins on both sides of the border,” McClem said.
Because of that uncertainty, McClem has shown a move to how central banks approach economic forecasts that they use to determine where to get a policy rate that falls at 2.75% after seven consecutive cuts.
Tariffs have been imposed and changed multiple times so far this month, and while it is not entirely clear where President Donald Trump will launch a trade dispute next, he is threatening another round of “mutual” tariffs on April 2nd.
McClem has warned in the past that the Bank of Canada’s toolbox is not suited to tackle both higher inflation and a blow to the Canadian economy at the same time.
McClem agreed to economic forecasts and not the typical approach of setting monetary policy along that path, monetary policy makers would focus more on setting rates that suit the extent of risks facing Canada.
In doing so, central banks can avoid risking choosing one path and predicting their associated monetary policy needs.
The Bank of Canada said it needs to be “flexible and adaptable” to respond quickly to new developments on the Customs Front.
“We need to have a policy that minimizes risk,” he said. “That means looking down on the future until the situation becomes clearer, and it may mean moving quickly as things crystallize.”
Macklem’s speech was a few days after Statistics Canada reported an inflation rate of 2.6% in February, mainly thanks to the end of Ottawa’s two-month GST break.
Macklem said that since the Bank of Canada has prepared multiple scenarios, it is unclear how quickly companies will pass the higher tariffs to their customers.
In the possibility that broad tariffs could have passed rapidly over the course of a year, inflation rates for the first quarter of 2026 will rise by about 2.25% compared to no trade war. Bank of Canada’s January forecast showed that inflation rates were on average until 2026 before the impact of tariffs.
Examples of predicting a rapid price increase will rewind a one-off hit to tariff-related inflation earlier, but will decline almost entirely from forecasts by the end of 2027.
Other scenarios where you see a more gentle pass-through at a higher price means that inflation hits aren’t as high as the first case study, but stay longer.
McClem said the Bank of Canada is sticking to its commitment to price stability and will use its policy rate to maintain inflation.–Canadians’ expectations for inflation–Under control.
“We cannot resolve trade uncertainty, but there is no doubt about our commitment to low inflation. Canadians need to have the confidence to maintain price stability over time, even during periods of major upheaval,” he said.
