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Canada’s central bank has cut its benchmark interest rate to the lowest level since 2022, warning that a trade war with the US will probably slow the pace of Canadian economic growth and increase inflationary pressures.
The Bank of Canada on Wednesday reduced rates by 0.25 percentage points, as expected, to bring its policy rate to 2.75 per cent. It marked the seventh consecutive cut in the BoC’s monetary policy easing cycle.
The move came hours after US President Donald Trump’s tariffs on steel and aluminium imported from Canada took effect earlier on Wednesday. Trump has also imposed, then delayed, 25 per cent tariffs on Canada and Mexico, despite the US having a free-trade pact with the two countries.
BoC governor Tiff Macklem told reporters that Canada’s economy ended 2024 in “good shape” but was now facing a “new crisis” due to the trade war with the US.
“Depending on the extent and duration of the US tariffs the economic impact could be severe; the uncertainty alone is already causing harm,” he said.
He added that a weaker Canadian dollar is adding costs to importing goods and unemployment is likely to rise over the coming months due to weaker consumer demand.
Alongside its policy decision, the BoC published survey data that suggested threats of new tariffs and uncertainty about the US-Canada trade relationship were having a “big impact” on consumer and business confidence.
Macklem said the survey indicated Canadian businesses, particularly those in manufacturing and sectors dependent on discretionary consumer spending, had lowered their sales outlooks.
“Our surveys also suggest business intentions to raise prices have increased as they cope with higher costs related to both uncertainty and tariffs,” Macklem said.
The BoC also cautioned that “monetary policy cannot offset the impacts of a trade war” and Macklem warned that the severity of the impact of new US tariffs on the Canadian economy would depend on their extent and duration.
On Sunday the minority government’s Liberal party chose former Bank of England and Bank of Canada governor Mark Carney as their new leader and prime minister, replacing Justin Trudeau. Carney has pledged to “build the strongest economy in the G7”.
Carney is expected to call an election that will be held probably in late April or early May. Canada must hold a national vote before October.
Source: Economy - ft.com
