Bank of Canada Warns of Permanent GDP Loss if Trade War with U.S. Continues

The Bank of Canada (BoC) has raised concerns over the potential long-term impact of a trade conflict with the United States. According to the minutes of its January 29 policy meeting, members of the Governing Council agreed that a prolonged trade war would permanently cause GDP loss.

The BoC recently cut its key interest rate by 25 basis points to 3%, marking its sixth consecutive reduction. However, the central bank warned that uncertainty surrounding U.S. tariffs could overshadow any short-term economic relief.

Trade Uncertainty Weighs on Canada’s Economy

With 75% of Canadian exports going to the U.S., Canada’s economy remains vulnerable to shifts in trade policy. The BoC noted that retaliatory tariffs could increase inflation and disrupt supply chains.

Governing Council members spent significant time discussing how ongoing trade tensions could impact inflation, economic output, and monetary policy.

• Retaliatory tariffs could push up the price of imported goods.
• Higher input costs may cause businesses to raise consumer prices.
• Supply chain disruptions could weaken economic stability.

GDP Growth at Risk Amid Tariff Uncertainty

The BoC minutes highlighted that a sustained trade war would have lasting effects. The Canadian economy would not fully recover, and GDP growth would remain lower even after adjustments.

“While retaliatory tariffs would likely represent a one-time price increase, the size of the shock could raise inflation expectations,” the report noted. If businesses anticipate continued trade instability, price increases could persist.

Interest Rate Cuts and Future Policy Moves

In response to the growing trade uncertainty, the BoC justified its latest rate cut, citing:

• The need to support economic growth.
• The increasing unpredictability of U.S. trade policy.
• The impact of tariffs on business confidence and consumer sentiment.

The central bank avoided providing forward guidance on future rate moves, citing the unpredictability of trade developments. However, it committed to closely monitoring economic indicators and keeping Canadians informed.

Asset Purchases Set to Resume

As part of its policy response, the BoC will restart asset purchases on March 5, 2025. The first step will be term repo operations, with settlement balances expected to stabilize between $50–70 billion over the year.

With U.S. tariffs remaining a major economic threat, the BoC will continue assessing risks and adjusting policy accordingly. The next rate decision will depend on how trade negotiations evolve and how businesses respond to ongoing uncertainty.

More…

• https://www.cbc.ca/news/business/bank-of-canada-gdp-1.7457395
• https://www.canadianmortgagetrends.com/2025/02/bank-of-canada-warns-of-permanent-gdp-hit-if-trade-war-with-u-s-drags-on
• https://www.cbc.ca/player/play/video/9.6642748 
• https://www.overheretoronto.com/canadian-premiers-press-white-house-officials-on-u-s-tariffs