The Bank of Canada delivered a sixth consecutive interest rate cut on Wednesday but slowed the pace of its easing cycle.
The central bank also warned that Canada’s economy would be “tested” if the United States delivers on a threat to impose blanket tariffs on Canadian goods, and said there was more “uncertainty” in its outlook because of the looming trade dispute.
The Bank of Canada cut its benchmark interest rate by 25 basis points, bringing the policy rate down to 3.0 per cent. The move was widely expected by markets and most economists.
The quarter-point reduction marks a step down from the Bank of Canada’s moves to cut by an oversized 50 basis points in its two previous decisions.
Trump tariff threats loom over policy rate
Wednesday’s statements contained little forward guidance from the central bank about where interest rates could be heading next.
Instead, the Bank of Canada’s focus revolved largely around the threat of tariffs from the United States and the impact of a looming trade dispute.
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“The potential for a trade conflict triggered by new U.S. tariffs on Canadian exports is a major uncertainty. This could be very disruptive to the Canadian economy and is clouding the economic outlook,” said Bank of Canada governor Tiff Macklem on Wednesday.
The central bank warned in a statement accompanying the rate cut that, “if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested.”
Macklem said that it’s unclear exactly how Canada’s economy would respond to tariffs, because policymakers don’t know how steep the restrictions would be, what they would cover and how long they would be in place. How Canada would respond is also a wild card in the forecast.
“Nevertheless, some things are clear,” Macklem said.
“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada. At the same time, the higher cost of imported goods will put direct upward pressure on inflation.”
The central bank shifted its monetary policy stance from tightening to easing last year amid signs inflation had come back under control and the slowing economy could use a boost.
While annual inflation cooled to 1.8 per cent in December, there were signs of stubbornness in metrics of core inflation that are closely watched by the Bank of Canada.
Macklem said that with inflation back around the central bank’s two per cent target, monetary policy “is better positioned to help the economy adjust to new developments.”
More to come…
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