The Bank of Canada is set to make decision on June interest rates

The Bank of Canada cuts interest rate to 3% as U.S. tariff threats loom

With inflation sitting at around 2 per cent, the Bank of Canada (BoC) decided to reduce the policy rate a further 25 basis points to 3 per cent, marking a sixth consecutive interest rate cut.

BoC governor Tiff Macklem made the announcement at a press conference on Wednesday morning, touching on potential looming U.S. tariffs. With just a quarter point reduction rather than the 50 basis point interest rate cut for the previous two announcements, the central bank may be slowing its easing cycle in response to the tariff threat. If President Donald Trump follows through with implementing a 25 per cent tariff on all imports from Canada on Feb. 1, Macklem said that the resilience of Canada’s economy will be tested.  

Macklem warned that a major trade conflict with the U.S. would cause major “uncertainty.” For one, a prolonged trade war would “have a severe effect” on Canada’s economy by increasing the cost of imports, particularly on food, which he said could impact Canadians fairly quickly, but the effect of inflation on other goods could take some time.

“Unfortunately, tariffs mean economies simply work less efficiently — we produce and earn less than without tariffs,” Macklem told reporters. “Monetary policy cannot offset this. What we can do is help the economy adjust. With inflation back around the 2% target, we are better positioned to be a source of economic stability.”

Although tariffs would lead to lower economic activity and growth “for a period,” Macklem said they weren’t factors in the rate cut decision.

“Since [the] scope and duration of a possible trade conflict are impossible to predict, the MPR [Monetary Policy Report] projection we published today provides a baseline forecast in the absence of tariffs,”  Macklem told reporters.

Projections in January’s Monetary Policy Report (MPR) provide a baseline forecast in the absence of new tariffs. According to the report, the global economy is expected to continue growing by about 3 per cent over the next two years. Growth in the U.S. has been revised up, mainly due to stronger consumption, while growth with the euro will likely be subdued due to competitiveness pressures. Since October, financial conditions have varied across countries — the Canadian dollar has depreciated against the U.S. dollar, mainly due to trade uncertainty and broader strength in the U.S. currency.

The report also looks at different scenarios on what could happen if Canada gets into a trade war with the U.S. In one scenario, if both the U.S. and Canada impose 25 per cent tariffs on each other, this would result in a 2.5 per cent drop in Canada’s GDP in the first year and a 1.5 per cent drop in the second year, meaning Canada could enter a recession.

Setting aside threatened US tariffs, the upside and downside risks around the outlook are reasonably balanced,” the BoC stated in a press released. “However, as discussed in the MPR, a protracted trade conflict would most likely lead to weaker GDP and higher prices in Canada.”

On March 12, the BoC will announce its decision regarding the overnight rate target, and on April 16, it will publish its next full outlook for the economy and inflation.

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