Canada's economy has outperformed expectations despite trade tensions – and inflation is also showing upside risk
Canadian economic growth and inflation trends are creating a complex environment for monetary policy, according to Doug Porter, chief economist at Bank of Montreal (BMO) Capital Markets.
In a recent discussion with the Financial Post, Porter outlined BMO’s outlook on interest rates, consumer performance, and the broader implications of ongoing tariff uncertainty for Canada’s economy.
Porter said that while inflation remains slightly elevated—with core inflation above 3%—and economic activity showing resilience with over 2% growth in Q1, these headline indicators alone don’t support aggressive rate cuts.
However, underlying dynamics, including front-loaded exports and inventory build-ups ahead of tariff deadlines, may be distorting the strength of the data.
Some of the recent GDP growth may reflect businesses moving early to avoid trade disruptions.
“There were actually a lot of exports to the US as their businesses were loading up on inventories,” Porter said. He added that BMO still anticipates economic momentum to slow over the coming quarters and sees further easing of rates as likely.
Porter acknowledged that the Canadian economy has fared better than many had expected amid trade tensions, particularly because Canada has so far avoided the full brunt of tariffs.
While certain sectors like steel and aluminum have been directly impacted—with effective tariff rates reaching nearly 6%—broader sectors of the economy have been relatively insulated.
This partial exposure, however, doesn’t mean the economy is immune to stress. Canadian banks have reported rising provisions for credit losses.
According to Porter, while consumer insolvencies are increasing, they are returning to pre-pandemic levels rather than indicating new systemic risk. Despite signs of strain, income growth has remained relatively steady, and consumer behavior has not completely pulled back—evident in the continued strength of auto sales.
Porter also emphasized the difficulty of forecasting under current conditions.
“It is very tricky. You do have to look at almost every major data point with the question in mind, ‘has this been affected by tariffs?’” He pointed to the unemployment rate and inflation as core indicators that still offer reliable guidance.
Looking ahead, BMO’s forecast includes another 75 basis points in rate reductions, with expectations that the Bank of Canada could lower its overnight rate to 2% by early next year—below current market pricing.
What’s your view on BMO’s forecast and the Bank of Canada’s next move? Let us know your thoughts in the comments.
