The Bank of Canada cut its key policy rate by 25 basis points to 2.75% on Wednesday, warning of economic risks from U.S. tariffs.
The central bank said it would proceed cautiously with further rate changes as it balances inflation pressures from higher costs against weaker demand.
The rate cut marks the seventh consecutive easing in the past nine months, bringing the total reduction to 225 basis points. Bank of Canada Governor Tiff Macklem said the economy ended 2024 on solid footing but now faces a new crisis.
“Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe. The uncertainty alone is already causing harm,” he said at a press conference.
President Donald Trump imposed a 25% tariff on all steel and aluminum imports on Wednesday, prompting Canada to announce C$29.8 billion ($20.68 billion) in retaliatory tariffs, effective Thursday. The central bank warned that a prolonged trade conflict could weaken GDP growth while raising consumer prices, complicating monetary policy decisions.
Macklem said the Governing Council would monitor how the downward pressure from a weaker economy and the upward pressure from higher costs influence inflation trends.
The trade dispute is expected to slow first-quarter GDP growth and potentially affect job market recovery. Inflation is projected to reach 2.5% in March, up from 1.9% in January, as a temporary sales-tax break expires.
Concerns over tariffs have already pushed short-term inflation expectations higher.
The Canadian dollar strengthened 0.20% to 1.4403 against the U.S. dollar, or 69.43 U.S. cents, following the rate decision. Yields on two-year government bonds fell 0.8 basis points to 2.521%.
Market analysts estimate a 45% chance of another 25-basis-point rate cut at the Bank of Canada’s next policy announcement on April 16.
A special central bank survey conducted from late January to February indicated growing concerns over job security, particularly in industries exposed to U.S. trade. Businesses have lowered sales expectations, faced credit challenges, and delayed hiring and investment due to the weaker currency and rising import costs.
Macklem stated that monetary policy cannot offset the full impact of a trade war but must ensure higher prices do not lead to sustained inflation.
