The Bank of Canada reduced its key interest rate on Wednesday, hours after the U.S. Canada was hit with new steel and aluminum tariffs from President Donald Trump. The central bank cut its benchmark rate by 25 basis points, bringing it down to 2.75 per cent. This marked the bank’s seventh rate cut in a row. Tiff Macklem, governor of the Bank of Canada, said in a statement on Wednesday that while Canada’s economy entered 2025 on “solid footing,” Trump’s tariffs pose a new challenge because inflation has remained close to the bank’s target rate of 2% since last summer. “In recent months, the pervasive uncertainty created by continuously changing US tariff threats has shaken business and consumer confidence. Macklem stated, “This is constraining household spending intentions and business hiring and investment plans.” “Against this background, and with inflation nearing the target of 2%,” the Governing Council decided to cut the policy rate by 25 basis points. Macklem added that inflation is likely to rise in the coming months as a result of the dispute over trade with the United States. “Businesses have lowered their sales outlooks, notably in manufacturing and in sectors that depend on discretionary spending by households,” he said. “Some businesses are finding it harder to get credit, and the Canadian dollar’s weakening has made it more expensive to buy imported machinery and equipment. Many businesses have reduced their plans for hiring and investing as a result of all these trade-related factors. Macklem responded, “It’s going to depend a lot on what the U.S. does with their trade policy,” when asked if Canada was facing a recession. Carolyn Rogers, senior deputy governor of the Bank of Canada, stated, “The economy came in quite strong at the end of last year,” despite the fact that the central bank does not have a forecast. If not for the enormous cloud of economic uncertainty, that would have been fantastic news. We hear from businesses that they are cutting back on investment and hiring. Canadians are spending less and saving more. All of those things have a negative impact on growth. According to the Canadian Chamber of Commerce’s principal economist Andrew DiCapua, “the Canadian economy faces another large hit with tariffs on steel and aluminum coming into effect this morning.” If tariffs continue to rise, “the stronger growth mentioned by the Bank of Canada will become irrelevant in the months to come.” According to him, “the need to be in a lower policy stance to preserve diminishing Canadian sentiment is reinforced by the fact that the added uncertainty is clearly showing up in the data of the Bank’s survey,” Outside of the threat of tariffs, Canada’s economy has had some successes in recent months. In the fourth quarter of 2024, the economy of Canada expanded by 2.6%, and employment increased from November to January, bringing unemployment down to 6.6%. However, according to economists, the Bank of Canada’s decision will be heavily influenced by the threat that Trump’s tariffs pose to Canada’s economy.
Bank of Canada cuts interest rate as trade war ‘doesn’t bode well’
