Bank of Canada Cuts Interest Rate to 3%, Warns of U.S. Trade War Impact
The Bank of Canada (BoC) has cut its key interest rate by 25 basis points to 3%, marking the sixth consecutive reduction since June 2024. While inflation remains stable at around 2%, the looming threat of U.S. tariffs is adding uncertainty to Canada’s economic outlook.
Why the BoC Cut Rates Again
The central bank’s decision follows a sluggish economic growth forecast and continued concerns about excess supply in the economy. In a statement, the BoC Governing Council emphasized that with inflation within its target range, it made sense to ease borrowing costs further.
BoC Governor Tiff Macklem addressed the media, noting that while the prospect of a trade war with the U.S. is a significant risk, it was not a direct factor in the bank’s decision to cut rates.
“Since the scope and duration of a possible trade conflict are impossible to predict, today’s Monetary Policy Report (MPR) provides a baseline forecast in the absence of tariffs,” said Macklem.
The U.S. Tariff Threat: What It Means for Canada
Despite the BoC’s effort to stabilize the economy, uncertainty remains due to potential U.S. tariffs on Canadian imports. U.S. President Donald Trump has proposed a 25% tariff on all Canadian imports starting February 1, 2025.
If both Canada and the U.S. impose reciprocal 25% tariffs, the BoC’s models predict:
- A 2.5% drop in GDP in the first year
- A 1.5% GDP decline in the second year
- Higher inflation due to increased costs of imported goods
- Weaker trade balance and possible Canadian dollar depreciation
- Job losses as exporters cut production and reduce business investment
According to Macklem, tariffs would make the economy less efficient by increasing costs and reducing productivity.
“Monetary policy cannot offset the economic impact of a broad-based trade conflict. We produce and earn less with tariffs in place,” Macklem warned.
What’s Next for Interest Rates?
The next BoC rate decision is scheduled for March 12, 2025. Market analysts estimate a 43% chance of another 25-basis-point cut depending on how the trade situation unfolds.
Some experts believe the BoC may have to accelerate rate cuts if tariffs take effect. Doug Porter, BMO’s chief economist, noted that while the bank is cautious about reacting too quickly, it might have no choice but to slash rates further if trade conditions worsen.
“The Bank of Canada is preparing for a possible trade war storm,” Porter said.
Federal Government’s Potential Response
Sources indicate that the federal government is drafting a stimulus package to counter the economic fallout of a trade war. While details are still uncertain, relief measures could reach pandemic-level support for businesses and households.
However, some economists warn that excessive stimulus could increase the federal deficit and trigger long-term inflation concerns. Jean-François Perrault, Scotiabank’s chief economist, highlighted how COVID-19 relief programs contributed to inflation, leading the BoC to hike rates aggressively in the past.
Canada’s Economic Outlook
The BoC has revised its growth forecast for 2025, lowering expectations from 2.1% to 1.8%. The outlook for 2026 is also down to 1.8% from 2.3%. Inflation projections remain slightly above target, at 2.3% for 2025 and 2.1% for 2026. These estimates do not yet factor in U.S. tariffs, making the outlook uncertain.
Additionally, Canada’s economic growth per capita has declined for six straight quarters, largely supported by population growth. With new federal immigration curbs, Canada may see a 0.2% population decline in 2025 and 2026, potentially dampening demand further.
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