Inflation has been 'firming' – and could complicate the central bank's plans, Poloz says
Markets betting on more rate cuts from the Bank of Canada may be misjudging the central bank’s priorities, former governor Stephen Poloz has warned.
Speaking during a webinar hosted by law firm Osler, Hoskin & Harcourt LLP, where he now serves as a special adviser, Poloz argued that inflationary pressures—not economic weakness—will likely dominate policy considerations for the foreseeable future.
“Inflation has been kind of firming lately, using the core measures the Bank of Canada pays attention to,” said Poloz. “And the counter tariffs that the government has put in place will start boosting inflation in the next couple of months.”
Inflationary focus takes centre stage
Although Canada’s headline inflation rate stood at 1.7% in April, underlying core measures—a closer gauge of persistent inflation—exceeded 3%. That’s elevated enough to keep policymakers cautious, especially with tariffs looming as an added inflation driver.
On June 4, the central bank chose to hold its benchmark rate steady at 2.75% for the second meeting in a row. Governor Tiff Macklem explained the bank is still assessing the economic fallout from escalating trade barriers. While he acknowledged that retaliatory tariffs have not yet appeared in the official CPI data, he expects their influence to emerge soon. Ottawa has slapped 25% tariffs on nearly $60 billion worth of American goods in retaliation for US measures, with further actions potentially on the horizon.
Reflecting on the missteps of the pandemic recovery period, Poloz emphasized the need for vigilance. The central bank had originally dismissed the inflation surge as temporary—an error he believes has left lasting scars on monetary decision-making.
“The central bank said, ‘Don’t worry, that’s a transitory thing.’ Well, transitory turned out to be two years,” he said. “Having learned that lesson the hard way, I think central banks are going to be much more preoccupied with inflation risks.”
RBC's Robert Hogue highlights that while Toronto's existing home sales rose 8.4% in May, elevated inventory weighs on prices. Vancouver's resale transactions declined for the sixth consecutive month, as noted in the bank's analysis.https://t.co/wfj5il92CN
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 11, 2025
Economic outlook dimmed by trade and employment strain
While the first quarter delivered a modest 2.2% annualized GDP growth—fuelled by export activity ahead of anticipated tariffs—the second quarter is expected to be much weaker. Businesses scrambled to build inventory in anticipation of trade disruptions, but economists warn the honeymoon may be short-lived.
The job market is already showing signs of stress, with unemployment rising to 7% in May. The manufacturing sector has borne the brunt of the damage, as firms hesitate to hire amid policy uncertainty and global trade instability.
Poloz acknowledged these warning signs and described the employment downturn as a strong signal of recessionary risk. He anticipates more layoffs in the near term due to the ripple effects of tariffs. Still, he noted that while the labour market may worsen, the government appears prepared to deploy fiscal tools to soften the blow—leaving the central bank free to concentrate on controlling prices.
Deciding whether to cut interest rates, Poloz explained, hinges on diagnosing the root cause of the slowdown. Rate cuts might help if businesses are simply reacting to uncertainty and delaying decisions. But if tariffs are structurally damaging supply chains and production capacity, looser monetary policy could backfire.
“If it’s just uncertainty that’s causing companies to stop, pull back, then maybe cutting rates helps,” he said.
“Cutting rates in that context just boosts demand with no supply to meet it, and can actually cause inflation to go up,” Poloz added.
He also cautioned against drawing comparisons to Europe, where the European Central Bank has cut rates but faces a different inflation dynamic due to a lack of tariff retaliation. “Markets should not be assuming these things,” he warned.
US administration’s unpredictability causing significant headwinds
Beyond Canada’s borders, the tariff standoff could cause significant economic damage. Poloz estimated that US president Donald Trump’s aggressive trade agenda could knock as much as $40 trillion off global income over the coming years. The uncertainty, he said, is likely to continue curbing investment around the world.
Poloz was cautiously upbeat about the Liberal government’s recent steps on the fiscal front. He praised Ottawa’s moves to address internal trade, ramp up defence spending, push forward large-scale project legislation, and promote Canada’s role as an “energy superpower.”
“The government is off to a promising start,” he said, while noting doubt still lingers in parts of the country. “I’m seeing growing optimism in boardrooms, but the West remains understandably sceptical.”
Prime minister Mark Carney has promised a more transparent approach to federal budgeting, with plans to separate capital and operating spending. Critics, however, argue that such a move could obscure the true picture of Canada’s fiscal health.
“When someone presents a budget, they don’t get to say we’re going to do this and that’s going to cause the economy to grow enough that actually it won’t cause a deficit,” Poloz said.
“Convention is you say what you’re going to do, then of course you cross your fingers and hope it works, it makes the economy bigger, and over time the revenues for the government grow and the deficit goes away. But we all know that some of these things are so critical for economic growth, they’re guaranteed to pay off.”
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