The Bank of Canada decided to leave interest rates unchanged on April 16, which brought an end to the series of interest rate reductions that began in 2024.
Interest rates dropped from five per cent in April 2024 to 2.75 per cent in March. Despite the dramatic drop in interest rates, the Canadian economy continues to slow.
The unemployment rate stands at 6.7 per cent after a negative jobs report in March. Full-time employment dropped by 62,000 jobs in March.
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Consumer inflation, as measured by the consumer price index, is still rising with 2.6 per cent registered in February.
The combination of rising unemployment and inflation is a nightmare combination for the policy makers at the central bank. Its mandate is to keep inflation within the target range, which caused the pause in interest rate declines.
This pause will do little to stave off what appears to be an upcoming recession later this year. In my opinion, the Bank of Canada is underestimating the chances of the economy falling into a recession.
Inflation rates are unlikely to be a problem if the economy is entering a recession.
The U.S. economy is also slowing as tariffs and uncertainty around economic policy causes growth to slow.
Business investment on both sides of the border is slowing as the uncertainty continues to slow capital spending. The North American economy is clearly headed for a slowdown.
One of the negative impacts of the decision to pause interest rates is that the Canadian dollar has strengthened after the interest rate announcement.
The current exchange rate is hovering around US72.5 cents. This brings the Canadian dollar back to pre-U.S. election trading levels. The loonie was trading as low as US68 cents after the initial tariff announcements.
The rally in the Canadian dollar makes no sense from the relative economic fundamentals of both countries.
The overvalued loonie is going to pressure the Canadian export economy, including agriculture exports such as grain, pulses, oilseeds and livestock.
Not only will the overall Canadian economy experience a slowdown because of the pause in interest rates, but agricultural exports will also be impacted. The problem for farmers is that the stronger loonie is not helping offset the impact of tariffs on agricultural exports.
The next interest rate meeting by the Bank of Canada is scheduled for June 4. Hopefully, the decision will be to resume interest rate cuts at that meeting.
Bruce Burnett is Glacier FarmMedia’s senior editor for weather and markets.
