The Bank of Canada on Wednesday cut its key interest rate, a move that comes just hours after U.S. President Donald Trump issued new steel and aluminum tariffs against Canada.
The central bank cut its benchmark rate by 25 basis points, bringing it down to 2.75 per cent. This was the bank’s seventh consecutive interest rate cut.
Bank of Canada governor Tiff Macklem said in a statement Wednesday that while Canada’s economy had entered 2025 on “solid footing,” with inflation remaining close to the bank’s two per cent target rate since last summer, Trump’s tariffs pose a new challenge.
“In recent months, the pervasive uncertainty created by continuously changing US tariff threats has shaken business and consumer confidence. This is restraining household spending intentions and businesses’ plans to hire and invest,” Macklem said.
“Against this backdrop, and with inflation near the 2% target, Governing Council decided to reduce the policy rate a further 25 basis points.”
Macklem added that the trade conflict with the United States is likely to increase inflation in the coming months.
“Businesses have lowered their sales outlooks, notably in manufacturing and in sectors that depend on discretionary spending by households,” he said. “Credit has become more difficult to access for some businesses, and with a weaker Canadian dollar, the cost of imported machinery and equipment has risen. As a result of all these trade-related factors, many businesses have scaled back their hiring and investment plans.”
When asked if Canada was staring down the barrel of a recession, Macklem said, “It’s going to depend a lot what the U.S. does with their trade policy.”
While Bank of Canada senior deputy governor Carolyn Rogers said the central bank does not have a forecast, she added, “The economy came in quite strong at the end of last year. That would have been really good news but for this large cloud of uncertainty with the economy. What businesses are telling us is they’re slowing investment, they’re slowing hiring. Canadians are saving more, spending less. All of those things don’t bode well for growth.”
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Andrew DiCapua, principal economist at the Canadian Chamber of Commerce, said that “with tariffs on steel and aluminum coming into effect this morning, the Canadian economy faces another large hit.”
“The stronger growth mentioned by the Bank of Canada will become irrelevant in the months to come if tariffs continue to escalate. The added uncertainty is clearly showing up in the Bank’s survey data, which reinforces the need to be in a lower policy stance to preserve diminishing Canadian sentiment,” he said.
Outside of the threat of tariffs, Canada’s economy has had some successes in recent months. Canada’s economy grew by 2.6 per cent in the fourth quarter of 2024 and employment growth strengthened from November to January, with unemployment declining to 6.6 per cent.
However, the threat to Canada’s economy from Trump’s tariffs is what economists have said would weigh heavily on the Bank of Canada’s decision.
Doug Porter, chief economist at the Bank of Montreal, said on Wednesday that future monetary policy will depend on the direction the trade war takes. However, BMO forecasts three more consecutive cuts in the next three meetings.
“Clearly, that’s dependent on how tariffs evolve, while the eventual fiscal response could have an impact as well. Our core assumption is that Canada will be facing some serious tariffs for an extended period of time and that the growth dampening aspects of the trade war will ultimately outweigh the upside inflationary impact, keeping the Bank in easing mode,” Porter said in a note.
Tu Nguyen, economist at RSM Canada, said the uncertainty was already hurting Canadian growth and another round of tariffs in April could limit the bank’s options even more.
“If further trade measures are introduced in early April, expect the Bank of Canada to cut the policy rate by another 25 basis points to support growth and ease tariff pains. At this point, tariffs will usher in a one-time increase in prices rather than de-anchoring inflation,” she said.
Last month, Bank of Canada governor Tiff Macklem warned that the tariffs could significantly hit Canada’s economy.
“In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened,” Macklem said. “This time, if tariffs are long-lasting and broad-based, there won’t be a bounceback.”
Macklem said while Canada could recover part of the growth, the damage would be long-lasting.
“We may eventually regain our current rate of growth, but the level of output would be permanently lower. It’s more than a shock — it’s a structural change,” he said.
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