The Bank of Canada's April 29 decision to hold at 2.25% was expected. The language in Governor Tiff Macklem's opening statement was more instructive than the decision itself. Macklem identified two competing risks that could push monetary policy in opposite directions and acknowledged, with unusual directness, that the BoC cannot currently assign higher probability to one over the other.
The first risk is that oil-driven inflation, currently pushing CPI toward a projected 3% peak in April, does not stay contained. Macklem said explicitly that the BoC is looking through the war's immediate impact on inflation but will not let higher energy prices become persistent inflation. The second risk is that the CUSMA review, which reaches its July 1 deadline with formal negotiations still at an early stage, produces an outcome that removes tariff exemptions protecting roughly 90% of Canadian exports. Since the April decision, the picture has been further complicated: the April jobs report showed an unexpected decline in Canadian employment, reinforcing expectations that the BoC will hold rather than hike.
What the Core Measures Are Actually Saying
The headline CPI number captures the war's effect most visibly. The jump from 1.8% in February to 2.4% in March reflected the largest single-month gasoline price increase on record in Canada. The projected 3% April print would represent the fastest pace of CPI growth in more than a year. But the BoC's preferred core measures held steady at just above 2% in March. The proportion of CPI basket components rising faster than 3% has actually declined in recent months. So far, the oil shock has remained concentrated in energy and, to a lesser degree, food through the fertiliser channel. The April CPI print due in mid-May will be the first test of whether broadening is beginning.
The CUSMA Variable and the Jobs Miss
The July 1 CUSMA review deadline cuts directly against any hawkish impulse that elevated inflation would normally produce. The Bank's April forecast assumed the CUSMA would extend with limited changes. If negotiations go badly and Canada loses the tariff exemptions currently protecting the vast majority of its U.S.-bound exports, the Bank's own modelling suggests the economy falls into a deep recession, requiring rate cuts, not hikes.
The unexpected April employment decline makes the BoC's bind more acute. The unemployment rate has been running in the 6.5-7% range, reflecting weak hiring and ongoing job losses in tariff-affected sectors. CIBC economist Avery Shenfeld captured it precisely after the April 29 decision: "That sounds like a central bank that thinks it could stand pat, as it cites both reasons why it might have to cut or hike." The April employment data reinforces that characterization heading into June 10. The April CPI print, due in mid-May, is the next pivot point.