The Bank of Canada lowered its benchmark interest rate by a quarter point on Wednesday as the tariff battle with the United States starts to weigh on the Canadian economy. The policy rate stands at 2.75% after the central bank’s seventh consecutive rate cut. The move was widely expected by economists.
The Bank of Canada points to inflation and trade war
Bank of Canada governor Tiff Macklem said in prepared remarks Wednesday that signs of stability in inflation and momentum in the Canadian economy driven by previous rate cuts are at risk amid the trade war with the U.S.
“The pervasive uncertainty created by continuously changing U.S. tariff threats has shaken business and consumer confidence,” he said.
“The uncertainty alone is already causing harm.”
Macklem warned that the economic damage could be “severe,” depending on how steep tariffs are and how long they’re kept in place. He said that, if the dispute continues, growth in the second quarter of 2025 would take a hit.
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What led to this rate cut
Avery Shenfeld, chief economist with CIBC Capital Markets, said in a note to clients on Wednesday that evidence Canada's economy was heating up heading into 2025 likely would've been enough for the central bank to take a “wait-and-see approach” on further cuts—but then came the trade war.
U.S. President Donald Trump delivered on weeks of tariff threats against Canada on March 4, though those import duties have already shifted with a series of adjustments, delays and reversals.
Wednesday marks the next phase of Trump’s tariff agenda; 25% tariffs on imports of Canadian steel and aluminum entering the U.S. took effect just after midnight. Canada announced it would hit back with retaliatory tariffs the same morning.
The Bank of Canada’s latest interest rate announcement came alongside a supplemental survey of consumers and businesses specifically reacting to the spectre of tariffs from late January through February.
How are Canadians taking it all in
That data suggested that Canadians are planning to spend less as they worry about losing their jobs in the trade dispute, particularly in sectors like manufacturing that are vulnerable to tariffs.
Nearly half of businesses in the survey also suggested they’ll be ready to quickly pass on the higher costs tied to tariffs onto consumers, especially if they’re transparent with consumers about why prices are rising.
Inflation expectations are rising among both businesses and consumers, the Bank of Canada noted, a trend that can feed into inflation itself if left unchecked.
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Where are future BoC rate announcements headed?
Macklem said the central bank will “proceed carefully” with future rate changes as it weighs both the drag on economic growth and upward pressures in prices tied to the trade war. He said the Bank of Canada will use monetary policy to make sure the price shocks from tariffs don’t turn into a lasting bout of inflation.
Shenfeld said he expects the central bank will put more weight on growth risks than inflation in the short-term, leaving room for two more interest rate cuts by June.
April 16 is the date of the Bank of Canada’s next interest rate decision, which will come with a revised set of forecasts for the economy and inflation.
Read more personal finance news:
- Canada’s unemployment rate—plus, the rate by province and city
- The future of remote work jobs in Canada
- Tariff talk, economic uncertainty feature on Q4 earnings reports
- The U.S. imposes tariffs on goods from Canada and Mexico
The post Bank of Canada drops its key rate, points toward inflation and tariffs appeared first on MoneySense.