The Bank of Canada held its benchmark interest rate steady at 2.75% on Wednesday, marking its first pause after seven consecutive cuts. The central bank cited ongoing uncertainty stemming from U.S. tariffs, which made traditional economic forecasting unreliable.

Governor Tiff Macklem scrapped the central bank’s usual quarterly economic forecast for the first time since the pandemic and indicated he would be ready to act decisively if economic data worsens.

The unpredictability of tariffs have “increased uncertainty, diminished prospects for economic growth, and raised inflation expectations,” policy makers said in a statement. “Pervasive uncertainty makes it unusually challenging to project GDP growth and inflation in Canada and globally.”

Policy makers laid out two different scenarios: In the first scenario, tariffs are limited in scope, Canadian growth weakens temporarily and inflation remains around 2%. In the second, a protracted trade war causes a recession in Canada this year and inflation to rise above 3% next year. It added that many other scenarios are possible.

The Canadian dollar rose slightly on news of the pause and amid a broad decline in the U.S. dollar.

“The bottom line was that, to justify a rate cut, the Bank would have had to be forward-looking, rather than focused on where the data are today,” CIBC chief economist Avery Shenfeld wrote in a note to clients. “Instead, it decided that it would rather respond to the data as it happens, learn more about where trade policy is headed, and also, while they would never mention this, where fiscal policy in Canada ends up.”

Shenfeld said the central bank is being less forward-looking than normal and that poses a risk that, given the lag in the economy's response to rate decisions, any cut may fail to deliver enough relief on a timely basis. CIBC expects data in the next two months to indicate a GDP contraction in the second quarter, and so “a rate cut in June would then be well justified without looking beyond the data in hand.”

He also said CIBC sees more downside pressure than the central bank from uncertainty and a loss of confidence on Q2 GDP. With April inflation likely to drop below 2%, “signs of downside economic pressure should bring the Bank back to the rate cutting game in June,” and he wouldn’t rule out a 50 basis point cut.

“Thereafter, if Canada sees some success in negotiations with the US, a 2.25% overnight rate would mark the low for this cycle.”

Traders are divided on the central bank’s next move on June 4, with some projecting a drop to as low as 2% by year-end.