Andrew Pyle
April 16, 2025
When in doubt, sit tight and flip a call
It has become common these days, whether listening to CEOs providing guidance on earnings calls or government officials dealing with Trump’s policy vortex to offer up multiverse approach to forecasts. That list now includes the Bank of Canada, which decided this morning to leave its overnight rate target unchanged at 2.75% after 7 straight declines. While there was a decent probability that the Bank might take a proactive stance and lower rates again to provide an economic cushion, the decision can’t be faulted given the heightened level of uncertainty. In a frank statement, Governor Macklem said that “forecasts for economic growth are of little use as a guide to anything.” Welcome to the world of Trump.
Instead, the Bank is offering up two different scenarios. In the first one, the current trade fiasco eventually fades and tariffs are taken down. While GDP growth is forecast to stall in the second quarter under this assumption, it does pick up in the second half of the year and inflation resumes its downward drift. Under scenario 2, the tariffs stay in place and trade war is prolonged. The Bank predicts this will send the Canadian economy into a significant recession that lasts a year, while inflation moves up to 3.6% by the middle of next year.
The Bank’s statement comes on the heels of this morning’s report from the World Trade Organization (WTO), where it drastically cut its forecast for 2025 trade growth from a decent pace in its prior projection to now a decline. This would imply a significant downshifting in global GDP growth, so the Bank is correct in highlighting the recession risk. Clearly, you could drive a cargo tanker destined for more reliable trading partners through these two scenarios.
This is the first time since the pandemic that the Bank has pulled its forward guidance off the table, but it remains committed to responding if developing fundamentals call for it. We would read it to mean that if the hard data in the coming months comes in substantially weaker, the Bank will lower rates. The key point to keep in mind though is that with a target rate of 2.75%, there isn’t a ton of available ammunition to fight a recession should it emerge. Even though the Bank isn’t going to state that publicly, I’m pretty sure it impacted the decision today.
Not surprisingly, the Canadian dollar moved higher on the news this morning, breaking back above 72 US cents. This is still below Monday’s intraday high of 72.30 cents, but as the theme of a global US dollar exodus continues to unfold, we see the Loonie moving back to at least last year’s highs. You would have also thought that Canadian government bond yields would back up on a decision to hold rates unchanged, but the front-end of the curve actually edged lower his morning, and the 2-year extended its rally since last week’s high of 2.7%. And even with the lack of guidance, Canadian equities are underperforming this morning, with the TSX showing a modest lift against a backdrop of heavy losses for the S&P500 and NASDAQ.
On behalf of the Pyle Wealth Advisory team, have a wonderful rest of the week.
Andrew Pyle