The Bank of Canada has reduced its key policy rate by 25 basis points to 2.75 percent, citing concerns about inflationary pressures and weaker growth resulting from trade uncertainty and President Donald Trump’s tariffs.
In a statement on Wednesday, the bank also indicated it would “proceed carefully with any further changes” to rates, given the need to balance upward pressures on inflation from higher costs and downward pressures from weaker demand. This cautious stance, which some economists interpret as a signal that rates may not decrease further, follows months of inflation hovering around its 2 percent target.
“We’re focused on weighing those downward pressures and those upward pressures. Our job is to maintain price stability, and that’s what we’re focused on,” Governor Tiff Macklem stated during a press conference. However, he refrained from providing any forward guidance on the future direction of rates.
This rate cut marks the seventh consecutive easing of monetary policy by the central bank, reducing the key rate by a total of 225 basis points over nine months, making it one of the most aggressive central banks globally.
“We ended 2024 on a solid economic footing. But we’re now facing a new crisis,” Macklem said in his opening remarks. Trump’s fluctuating tariff policies and threats against a wide range of Canadian products have alarmed businesses, shaken consumer confidence, and dampened investment.
On Wednesday, Trump imposed a 25 percent tariff on all steel and aluminum products, prompting Canada to announce retaliatory tariffs of $29.8 billion Canadian dollars ($20.68 billion) on the U.S., effective Thursday.
The bank warned that a prolonged tariff war could lead to sluggish GDP growth and higher prices, creating a challenging scenario for deciding whether to raise or lower rates. Macklem emphasized that the rate-setting Governing Council would focus on assessing the timing and strength of both downward pressures on inflation from a weaker economy and upward pressures from higher costs.
He noted that the trade conflict could slow first-quarter GDP growth and potentially disrupt the recovery in the jobs market. Additionally, fears about the impact of tariffs on prices have already driven up short-term inflation expectations. Inflation is projected to rise to around 2.5 percent in March, up from 1.9 percent in January, as a temporary sales-tax break ends.
Following the decision, the Canadian dollar strengthened by 0.2 percent to 1.44 against the U.S. dollar. Currency markets are pricing in a 45 percent chance of another 25 basis point rate cut at the bank’s next announcement on April 16.
“The focus on rising inflation expectations in today’s release is somewhat hawkish,” said Royce Mendes, head of macro strategy for Desjardins Group.
### Slowdown
The U.S. is Canada’s largest trading partner, accounting for nearly 75 percent of all Canadian exports. A separate survey conducted by the bank from late January to the end of February revealed that many households are concerned about job security, particularly in sectors exposed to U.S. trade. The tariff threat has also forced businesses to lower their sales outlooks.
The survey highlighted that some businesses are struggling to secure credit, and a weaker currency has made imports more expensive. As a result, firms are scaling back hiring and investment plans. Macklem noted that the recent shift in consumer and business sentiment is expected to lead to a significant slowdown in domestic demand in the first quarter.
“Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation,” he concluded.
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