Bank of Canada Lowers Interest Rate Amid U.S. Trade War Concerns

The Bank of Canada has reduced its overnight lending rate by 25 basis points to 2.75% as ongoing trade tensions with the U.S. begin to impact the Canadian economy. The announcement was made on Wednesday, with Governor Tiff Macklem citing economic uncertainty as a key factor behind the decision.

Economic Growth Faces New Challenges

Macklem explained that Canada started the year with strong GDP growth and inflation within the central bank’s 2% target. However, the uncertainty surrounding the U.S.-Canada trade relationship has led to reduced business investments, hiring slowdowns, and weakened consumer confidence. Manufacturing businesses, in particular, have adjusted their sales forecasts downward in response to the volatility.

Against this backdrop, the Bank of Canada opted for a quarter-point rate cut, though Macklem noted that a surge in exports ahead of anticipated tariffs might temporarily offset the slowdown.

“While it is still too early to see the full effects of new tariffs on economic activity, our surveys indicate that the mere threat of additional tariffs is already impacting business and consumer behavior,” Macklem said in a press conference.

Rate Cuts Continue Amid Growing Uncertainty

This latest rate cut marks the seventh consecutive reduction since June 2024. Economists suggest that the central bank is taking precautionary measures to cushion the economy against potential shocks from higher tariffs.

“The Bank of Canada is clearly concerned that an economy which was otherwise stable now requires rate cuts to mitigate the impact of rising trade tensions,” said Avery Shenfeld, chief economist at CIBC.

Inflation Pressures and Consumer Costs

Internal research from the central bank suggests that Canadian businesses plan to raise prices to counteract the effects of tariffs. Macklem acknowledged that while reduced consumer and business spending typically lowers inflation, increased costs from trade disputes could have the opposite effect.

“We are now facing a new crisis. The severity of the economic impact depends on the scope and duration of U.S. tariffs, but the uncertainty alone is already causing damage,” Macklem warned.

While the Bank of Canada cannot prevent the financial strain from tariffs, it can use interest rates to manage inflationary pressures. The bank’s preferred measures of core inflation remain above 2%, driven largely by rising housing costs.

The Impact on Canadian Inflation

Macklem outlined several ways tariffs could influence inflation in Canada. The weaker Canadian dollar makes imports more expensive, retaliatory tariffs add costs, and businesses are forced to seek new suppliers and markets, all of which contribute to rising prices.

“Ultimately, these costs get passed on to consumers,” Macklem explained. “Our goal is to ensure any inflationary impact remains temporary.”

Recession Fears and Future Outlook

Although Macklem avoided using the word “recession” in his remarks, some economists believe a downturn is possible if trade tensions persist. Deputy Governor Carolyn Rogers stated that while growth prospects look uncertain, the central bank does not yet have a formal recession forecast.

Looking ahead, the Bank of Canada’s next interest rate meeting is scheduled for April 16, when it will release its quarterly monetary policy report. BMO chief economist Douglas Porter predicts that ongoing trade disputes will likely keep the Bank in an easing stance, with additional rate cuts expected in the coming months.

“Our assumption is that Canada will face extended trade-related challenges, leading the Bank to cut rates further,” Porter noted. He anticipates three additional 25 basis point cuts, which would bring the overnight lending rate down to 2%.

As the situation unfolds, Canadian businesses and consumers will need to navigate an increasingly uncertain economic landscape, with the Bank of Canada closely monitoring developments and adjusting policy as needed.

Bank of Canada cuts interest rate to 2.75% as country faces ‘new crisis’ from tariffs