Bank of Canada’s Tiff Macklem on lessons from the trade war and what risks he sees ahead

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A week before the Bank of Canada’s interest rate announcement in April, Governor Tiff Macklem and the bank’s six deputy governors were meeting in the Rasminsky Room in the central bank building in Ottawa to discuss the upcoming decision.

There’s a strict no-electronics rule for monetary policy deliberations, so the governing council members had left their phones outside.

When they entered the room, the world was still reeling from U.S. President Donald Trump’s “Liberation Day” announcement a week before, in which the President threatened double-digit tariffs on dozens of trading partners and sent financial markets into a tailspin.

“After debating that for a good hour-and-a-half, I decided we needed a little break. So we went out of the room and we checked our phones, of course, and President Trump had paused the April 2 universal tariffs on many countries for 90 days,” Mr. Macklem said in a year-end interview with The Globe and Mail.

“What was clear was that our debate for the last hour-and-a-half was completely – well, it was interesting intellectually, but it wasn’t really dealing with the situation in the moment.”

This was hardly the only swerve Mr. Macklem had to manage in a year defined by the United States’ sharp but erratic swing towards protectionism.

And it’s unlikely to be the last either. Canada is facing a review of the United States-Mexico-Canada Agreement (USMCA) with any number of possible outcomes – from relatively minor tweaks on dairy market access and other irritants to a wholesale U.S. withdrawal from the trilateral pact.

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The U.S. Trade Representative said this week that he will “keep the President’s options open” in the trade talks while pushing for concessions from Canada and Mexico. And given the rollicking year for U.S. trade policy – one that saw the President threaten, impose, pause, water down and increase tariffs on Canada multiple times – what happens next is unlikely to be a conventional negotiation.

Still, Mr. Macklem says he learned a good lesson in the early, frenetic days of the trade war.

“We can’t overreact to the latest piece of news,” Mr. Macklem says.

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The Bank of Canada moved through a year of profound uncertainty in fits and starts. It cut interest rates twice in the first quarter, to cushion the blow of U.S. tariffs. Then it paused through the summer, to see how trade disruptions would ripple through the economy, and whether they posed a bigger upside risk to inflation or downside risk to economic growth and employment.

The bank then cut two more times in September and October and ended the year back on the sidelines, keeping its policy rate at 2.25 per cent at the announcement last week.

Throughout much of the year, Mr. Macklem and his team were navigating without a map.

Given vacillating U.S. trade policy, the bank chose not to publish a baseline economic forecast, as it typically does to help guide monetary policy decisions.

Instead it published a series of upside and downside scenarios in its second- and third-quarter Monetary Policy Reports. Each scenario depended on varying U.S. tariff policy assumptions, and ranged from a deep recession in Canada to a robust rebound.

“There was a big part of me that wanted to get back to a projection. Nobody likes running policy off scenarios,” Mr. Macklem said. But “it just was not realistic to provide a central projection. And it wasn’t even helpful to try to decide where we were between the two scenarios.”

Ultimately, the Canadian economy made it to the end of 2025 in a better place than many expected at the outset of the year, and the bank returned to publishing a central forecast in its October MPR. There was a sharp contraction in gross domestic product in the second quarter as exports to the U.S. tanked. But growth rebounded in the third quarter, allowing the country to skirt a recession.

Unemployment remains elevated, particularly for young people and workers in the highly-tariffed industries. But the country has added around 180,000 jobs over the past three months, and the unemployment rate is ticking down.

And despite U.S. tariffs, Canadian countertariffs, and fracturing supply chains, there hasn’t been a major surge in consumer prices. Headline inflation has remained near the bank’s 2-per-cent target for the past year, while central bank economists think underlying inflation, which better captures current price pressures, is running at about 2.5 per cent.

Mr. Macklem chalked up the overall resilience of the Canadian economy to several factors.

The most important is the tariff carve-out Mr. Trump gave Canadian and Mexican products that comply with the rules of origin laid out in the USMCA.

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This has allowed most Canadian products to continue crossing the border tariff-free, and meant the average effective tariff rate on Canadian exports to the U.S. is only around 6 per cent – up from about zero last year, but among the lowest of any U.S. trading partner. In effect, the biggest impact of the trade war is concentrated in the handful of industries facing sector-specific tariffs: steel, aluminum, automobiles and forest products.

Canadian companies are also adapting. While trade to the U.S. is down sharply, there has been an increase in exports to other countries.

“Obviously when 75 per cent of your trade is with the United States, you’re not going to replace that easily,” Mr. Macklem said. “What we’re hearing from businesses is that they haven’t yet in a big way developed new external markets, but they have been able to ship more to clients that they already had in other countries.”

With the economy continuing to eke out growth and inflation mostly under control, the bank has said its policy rate is at “about the right level” at 2.25 per cent.

Financial markets have taken that to mean the central bank will remain on hold through the first half of next year. Bond traders are now betting the next monetary policy move will be a hike, not a cut, sometime in the fall.

Mr. Macklem reiterated that the policy rate appears to be “about right” based on the bank’s current read of where the Canadian economy is heading. But he said that uncertainty remains elevated, and that he and his team are willing to adjust interest rates in either direction if needed. “We need to be humble about our forecasts,” he said.

The biggest near-term risk, he said, is the review of the USMCA next year. The Trump administration indicated this week that Canada will need to make concessions on dairy market access and digital streaming rules if the agreement is going to be renewed.

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And the U.S. Trade Representative said he is looking to strengthen rules-of-origin for industries beyond automobiles – which could have a significant impact on Canadian supply chains – and will demand more alignment between the three countries on tariffs, export controls and foreign investment.

There are also risks tied to the artificial intelligence boom that has buoyed stock markets and spurred a massive amount of spending on data centres, particularly in the U.S.

“There’s a risk that the AI boom is overhyped and you see a big correction; certainly if the U.S. were to slow down sharply that would spill back into Canada,” Mr. Macklem said.

“On the other side of it, there’s a risk that if Canadian companies are not adopting new AI technologies … they are not as competitive as they need to be, and our economy underperforms.”

If Bank of Canada interest rates do end up on a steady glide path at 2.25 per cent for the next few quarters, that would be a notable change after years of extreme interest rates and rapid-fire changes in monetary policy.

After holding the policy rate near zero through much of the COVID-19 pandemic, the central bank raised interest rates 10 times in 2022 and 2023 to combat the biggest burst of inflation in 40 years. It then reversed course in the summer of 2024 and cut nine times, bringing the policy rate back down to where it is today.

While the policy rate is back near where it was before the pandemic, Mr. Macklem said it certainly doesn’t feel like the Canadian economy is settling into a new normal. Rather, the country is in the middle of a major structural adjustment.

“The era of open trade with the United States is over. We need to adjust. Frankly, I think the economy, it’s at a watershed moment. We’re at a crossroads. And the path we take is going to be very determinant of our future prosperity,” Mr. Macklem said.

In all this, the central bank can only play a supporting role, the Governor contends. Trade disruptions tend to increase prices, and the bank’s main responsibility is keeping inflation in check. The bank also doesn’t have the right policy levers.

For Canada to become less reliant on the U.S., it needs to diversify trading partners, convince Canadian companies to invest in productivity-enhancing equipment, and pull large sums of foreign capital into the country, even when favourable access to the U.S. market isn’t guaranteed. These things tend to involve federal and provincial fiscal policy more than monetary policy.

On this front, Mr. Macklem said things appear to be moving in a positive direction.

“I do think the threat that U.S. protectionism poses for our standard of living in this country has spurred a new policy momentum across the country. The federal and provincial governments are responding with velocity to open and grow our internal market, to diversify our trade, to increase investment, both public investment and to try and spur more private sector investment,” he said.

“There’s a lot of work to do to execute those plans. And the speed and the effectiveness of the execution is going to be critically important to determining the impact that these policies have on the Canadian economy … The other element that’s going to be really important is the uptake of the private sector.”

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All this crosses the desk of Mr. Macklem’s old boss Mark Carney, the former Bank of Canada governor who now occupies the Prime Minister’s Office, several blocks east of the central bank down Ottawa’s Wellington Street. Mr. Macklem was Mr. Carney’s senior deputy governor, the No. 2 position at the central bank.

Just how much do the two men talk these days?

“The short answer is the Prime Minister is very busy. And he actually doesn’t talk to me very often,” Mr. Macklem said, with a tone of mild exasperation usually reserved for answering reporters’ questions about where interest rates are going.

He said he’s spoken with Mr. Carney two or three times since he became Prime Minister, to share notes about the economic impact of U.S. tariffs. But his main point of contact with the government remains Finance Minister François-Philippe Champagne, with whom he meets regularly “as required by legislation.”

“We have not discussed interest rates or the path of monetary policy. We’ve really discussed the economy,” Mr. Macklem said of his conversations with Mr. Carney, who also ran the Bank of England before returning to Canada and entering politics.

“This government has been very respectful of the independence of the central bank. I have no concerns. And if there’s anybody that understands the importance of central bank independence, our prime minister has been governor of two G7 central banks, not one.”