Bank of Canada Sees Structural Shift in Economy From U.S. Trade Conflict, Keeps Outlook for Modest Growth and Stable Inflation

10:13 AM EDT, 10/29/2025 (MT Newswires) -- The Bank of Canada on Wednesday released its quarterly Monetary Policy Report, outlining four key messages, Governor Tiff Macklem said.

First, U.S. tariffs and trade uncertainty have weakened the Canadian economy. The BoC expects "very modest growth through the rest of the year, with some pickup in 2026," Macklem said in his opening statement at the press conference published alongside the MPR.

Second, while this weakness is restraining price growth, the trade conflict is also raising costs for many businesses, adding upward pressure on inflation. The central bank expects these opposing forces to roughly offset each other, keeping inflation close to its 2% target.

Third, to support the economy through this adjustment period, the BoC has lowered its policy rate by 50 basis points over the past two meetings and by 100 basis points since the start of the year.

Finally, the Bank of Canada said the weakness in the Canadian economy reflects more than just a cyclical downturn - it marks a structural transition. The U.S. trade conflict has eroded Canada's economic prospects, with tariffs causing lasting damage by reducing productive capacity and raising costs. This, in turn, limits how much monetary policy can stimulate demand while keeping inflation low.

For the first time since January and the onset of the trade conflict, the BoC is publishing a baseline outlook for economic growth and inflation instead of alternative scenarios, Macklem said. While U.S. trade policy remains unpredictable, its effects are becoming clearer.

According to the MPR, GDP growth is expected to resume in the second half of this year but remain subdued, averaging about 0.75%. Growth is projected to strengthen gradually through 2026 as exports and investment recover, averaging about 1.5% by 2027. This suggests that excess supply in the economy will be absorbed only gradually.

Even as growth recovers, the entire path for GDP is lower than it was before the shift in U.S. trade policy. By the end of 2026, the level of GDP is about 1.5% lower than forecast in January. About half of this downward revision reflects lost capacity as a result of the trade disruption. The other half is due to weaker demand.

The BoC expects inflationary pressures to ease in the months ahead and CPI inflation to remain near 2% over the projection horizon, he added.

If the economy evolves roughly in line with the outlook in the BoC's MPR, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment, said the governor.

If the outlook changes, the BoC is prepared to respond, Macklem noted.

For many months, the BoC has been stressing that monetary policy cannot undo the damage caused by tariffs, pointed out the governor. Increased trade friction with the U.S. means Canada's economy will work less efficiently, with higher costs and less income. Monetary policy can help the economy adjust as long as inflation is well-controlled, but it cannot restore the economy to its pre-tariff path.

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