The focus of the memo is the uncertainty regarding U.S. tariffs that underlies the Bank of Canada’s decision, and the potential effect of the tariffs on GDP growth rate, inflation and the labour market. For insight into how the interest rate decision might impact the Calgary real estate market, we asked CREB® Board Chair Susanita de Diego for her thoughts.
“While the previous rate cuts had a noticeable impact our real estate market, the decision to leave interest rates unchanged is having less day-to-day effect than shifting inventory dynamics are having,” says Susanita.
“In the first quarter of 2025, new listings rose by 21.5% compared to the same period last year, while sales declined by 17.3%. These evolving supply and demand patterns are now playing a more significant role in shaping Calgary’s real estate landscape than interest rate movements alone.
“Rising inventory is giving buyers more choices, and sellers are adjusting to a more competitive environment. This sets the foundation for a more balanced and sustainable market in the months ahead.”
CED Memo: Bank of Canada Pauses Rate Cuts – Navigating a Delicate Balance
On April 16, the Bank of Canada (BoC) held the policy interest rate at 2.75 per cent after making seven consecutive rate cuts since mid-2024. In an unprecedented move, recently released April 2025 Monetary Policy Report (MPR) introduces two economic scenarios instead of just one base-case forecast, which influenced the rate pause decision. These two scenarios demonstrate the increasing uncertainty surrounding tariffs and the significant shifts in U.S. trade policy have caused recent volatility in global trade and financial markets.
Key Points
Two-Scenarios Outlook:
The Bank presented two scenarios in its Monetary Policy Report (MPR) to reflect the uncertainty stemming from escalating trade actions by the U.S.
The first scenario examines a temporary stall in Canadian GDP growth during the second quarter of 2025, resulting in potential output of 1.8 per cent in 2025 and 1.3 per cent in 2026:
This model suggests the projected output for 2025 is followed by a modest recovery next year. Inflation is expected to fall below target due to excess economic capacity and the removal of the consumer-carbon tax.
The second scenario predicts a prolonged global trade war, resulting in economic growth of 1.2 per cent in 2025 and 0.4 per cent in 2026:
This model predicts continued trade disruptions would cause a sharper decline in exports and business investment, with inflation temporarily exceeding 3 per cent in 2026 due to tariffs and supply chain disruptions.
Trade and Tariff Uncertainty:
The unpredictability of U.S. trade policy and retaliatory tariffs from Canada has created significant uncertainties for businesses. This volatility has disrupted investment timelines and hiring plans. In the first quarter of 2025, Canadian exports experienced a temporary surge as businesses rushed to ship goods ahead of anticipated tariffs. However, this short-term increase is expected to decline due to rising trade policy risks and stricter compliance requirements.
As of April 2025, most Canadian goods are exempt from U.S. tariffs if they meet the rules of origin outlined in CUSMA. However, goods that do not comply with these rules are subject to a 25 percent tariff. Unfortunately, there is still confusion regarding which goods are compliant, adding complexity to supply chain guarantees and production for Canadian exporters.
GDP Growth:
The annualized growth rate of Q1 GDP is estimated to have slowed to 1.8 per cent after experiencing strong growth in late 2024. Business investment is expected to decrease by 2 per cent and residential investment may fall by 7 per cent. Significant declines in consumer spending is likely a result of the intensifying trade conflict and unprecedented uncertainty around economic conditions.
Inflation Trends:
In March 2025, the Consumer Price Index (CPI) report noted inflation was 2.3 per cent, a decline from February 2025 of 2.6 per cent. Although the removal of the consumer carbon tax is anticipated to temporarily reduce inflation in the near term, tariffs and supply disruptions may lead to upward pressure on prices.
Labour Market:
In March 2025, the unemployment rate increased to 6.7 per cent from 6.6 per cent in February 2025, but it remains below the recent peak of 6.9 per cent in November 2024.
Relevance to Calgary
The BoC’s decision to pause interest rate cuts reiterates the unprecedented uncertainty amid ongoing trade policy shifts. Current economic conditions, as described above, could have supported a rate cut to counteract downside risks.
However, the Bank decided there is currently too much uncertainty around the economic impacts of trade policies to raise or lower interest rates. The timing of price increases, price pass throughs, impact on business investment and household spending is too uncertain.
This decision reiterates the Governor’s sentiment during his speech in Calgary on March 20, 2025, that monetary policy cannot offset the effects of a trade war. We will continue to monitor economic indicators as they are released over the next few months to understand how the U.S. trade policy decisions are impacting business investment, the labour market, consumer spending, exports and inflation.
Resources:
• Bank of Canada holds policy rate at 2¾% (BoC)
• Monetary Policy Report: April 2025 (BoC)
• Consumer Price Index, March 2025 (StatsCan)
• Bank of Canada holds key interest rate steady at 2.75% amid U.S. trade uncertainty (GlobeandMail)
• The future is no clearer’: Bank of Canada holds key interest rate steady (BNNBloomberg)
• Bank of Canada holds key interest rate at 2.75%, says trade war could cause a recession (CBC)
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