Open this photo in gallery: Bank of Canada Governor Tiff Macklem takes part in a news conference after announcing an interest rate decision in Ottawa, Ontario, Canada March 6, 2024. REUTERS/Blair GableBlair Gable/Reuters Jeremy Kronick is vice-president and director of the Centre on Financial and Monetary Policy at the C.D. Howe Institute, where Steve Ambler, a professor of economics at Université du Québec à Montréal, is the David Dodge Chair in Monetary Policy. After seven straight cuts, the Bank of Canada hit the pause button on Wednesday and held its policy interest rate at 2.75 per cent. We have argued over the last few months that the bank needed to cut the overnight rate to at least get it back to the mid-point of the neutral rate range – where the economy is operating at potential and inflation is sustainably at the 2-per-cent target. The last cut to 2.75 per cent achieved that. With conflicting data and the on-again/off-again stance of the U.S. administration concerning tariffs, the bank was right to pause. Former Bank of Canada governor David Dodge recently said, “There is actually a great advantage to doing nothing.” We agree. What were the arguments in favour of a cut? Most revolved around uncertainty and the effect this would have on consumer spending and business investment. The Economic Policy Uncertainty index for Canada has reached stratospheric heights. It has averaged a value of 164 since 1985. However, since President Trump’s electoral victory and immediate threats toward Canada, this index has been on an upward trend. When the trade war began in earnest at his inauguration in January, the index hit a never-before-seen 883. By March, it had soared to 1,542 – more than nine times the historical average. We are in the realm of what economists refer to as “Knightian uncertainty” or, as Donald Rumsfeld once said, unknown unknowns. Financial institutions are also caught up in this uncertainty. The economic analysis departments of the major Canadian banks are updating their forecasts with dizzying frequency – and the dispersion of their predictions for economic growth is notably large. Second-quarter predictions range from negative 3 per cent (annualized) on the low side to 1.2 per cent on the high side. Of the Big Six banks, three were predicting two quarters of negative growth (the oft-used definition of a recession), one was predicting the economy to shrink only in the second quarter, and two were predicting growth to remain positive. This wide dispersion in forecasts no doubt reflects forecasts based on different scenarios for the path of U.S. tariffs and for possible Canadian retaliation to those tariffs. While the U.S. administration has spared Canada in recent tariff announcements, its shifting focus to China is also a significant concern. A trade war between the two largest economies will lead to a global slowdown of economic growth and will catch Canada in its crosshairs. All this uncertainty will cause consumers to think twice about spending, and businesses to hesitate to invest – an area of the Canadian economy that was already weak. So, why not cut again? Uncertainty plays a role here, too. Conditions are so unprecedented that it is impossible even to assign probabilities to different scenarios. Governor Macklem had indicated in advance that this kind of uncertainty may lead the bank not to publish a central scenario in the quarterly Monetary Policy Report. It followed through on that warning, instead publishing two “illustrative scenarios.” The last time it did not publish a central scenario was at the beginning of the COVID-19 pandemic. The recent Bank of Canada surveys of consumer and business confidence show that inflation expectations have actually been increasing in recent months. This is a nightmare scenario for a central bank, as despite consumers cutting back on spending and businesses not investing, they still expect inflation to increase. This also means that a policy rate of 2.75 per cent has actually become looser in real terms, making it less urgent to provide support to economic activity by cutting rates. The uncertainty in forecasting in this environment is the major issue in our view. However, the bank must, of course, also rely on the available data, and there are signs pointing to the wisdom of holding. Headline inflation (the change in the Consumer Price Index over the last twelve months) spiked to 2.6 per cent in February. While mostly the result of the end of the GST/HST holiday, this was the first time it had been above the 2-per-cent target since July of last year. Inflation numbers for March came out Tuesday morning, and, while softer at 2.3 per cent, are still above target. The removal of the retail carbon tax and lower oil prices will continue to put downward pressure on inflation, but core inflation remains elevated and sticky at 2.9 and 2.8 per cent for CPI-Median and CPI-Trim, respectively. And, the components of core inflation that exceeded 3 per cent in March were 42 per cent, up from 24 per cent at the end of 2024. A 50-50 view from markets on whether the bank was going to cut is rare these days, with all the guidance central banks provide. But it reflects the times we live in with heightened levels of uncertainty. Lots of people were telling the bank to “do something.” They were right to sit tight.