Bank of Canada Cuts Rate to 2.75 Percent, Warns of Potentially ‘Severe’ Trade War Impacts

Governor of the Bank of Canada Tiff Macklem participates in a news conference on the Bank's interest rate announcement and release of the Monetary Policy Report, in Ottawa, on Jan. 29, 2025. The Canadian Press/Justin Tang

OTTAWA—The Bank of Canada has brought its key interest rates down by 25 basis points to 2.75 percent, marking the seventh consecutive cut amidst “pervasive uncertainty” around the trade war with the United States.

Bank of Canada Governor Tiff Macklem said the imposition of 25 percent tariffs by the U.S. and the “pervasive uncertainty” caused by the country’s continually changing economic threats has harmed business and consumer confidence in Canada. The trade war is expected to lower economic activity, force businesses to reconsider hiring and investing, and increase inflation, he said.

“Governing Council will proceed carefully with any further changes to our policy rate given the need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand,” Macklem said on March 12.

U.S. President Donald Trump imposed 25 percent tariffs on Canada and Mexico earlier this month, but soon after instituted a one-month pause for products compliant with the United States-Mexico-Canada Agreement. U.S. tariffs on steel and aluminum came into force on March 12.

Trump has also threatened to impose high tariffs on lumber and dairy products, and intends to place reciprocal tariffs on all countries beginning on April 2.

“We’re now facing a new crisis. Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe,” Macklem said. “The uncertainty alone is already causing harm.”

Macklem noted that Canada’s economy finished 2024 on better than expected footing. Its GDP grew by 2.6 percent in the fourth quarter after growing by 2.2 percent in the third quarter. Employment also grew toward the end of 2024, leading Canada’s unemployment rate to shrink to 6.6 percent.

Inflation hovered around the bank’s target of 2 percent at the end of 2024, with the Liberal government’s two-month GST holiday on some items lowering consumer prices. But the bank said January’s inflation numbers came in “a little firmer than expected” at 1.9 percent, and projects inflation will rise to 2.5 percent in March as the tax break ends.

The impact of the trade war on inflation is “more difficult to assess,” as the uncertainty around tariffs will lower household and business spending and put downward pressure on prices, Macklem said. But at the same time, the lowered value of the Canadian dollar and Ottawa’s retaliatory tariffs will make imports more expensive, putting upward pressure on inflation.

The bank’s monetary policy alone “cannot offset the impacts of a trade war” with the U.S., but it can prevent higher ongoing inflation, Macklem said. The bank will be assessing the upward pressure on inflation from higher costs and the downward pressure from lowered economic activity to chart the best path forward, he added.

Survey of Businesses and Households

The Bank of Canada also released a report detailing its consultations with businesses and households to determine how they are being impacted by the trade war. The survey conducted from Jan. 29 to Feb. 28 suggests that Canadians find the economic climate to be “unpredictable,” because the scope and magnitude of the planned U.S. tariffs has been changing daily and sometimes hourly.

Canadian households expressed concern about job security and financial health, with many of them saying they intend to spend less. Those working in the sectors of manufacturing, mining, oil and gas, and agriculture and forestry, where more than 30 percent of jobs are reliant on exports to the U.S., said they are particularly concerned with their job security.

Many businesses have been forced to rethink their hiring and investment plans and revise their sales outlooks. While sectors dependent on household discretionary spending have seen lower sales, some businesses have seen a strong “Buy Canadian” sentiment that has mitigated the negative impact.

Businesses surveyed also said the trade war is already leading to an increase in their costs, and half of businesses said they plan to increase their prices in response to tariffs. Businesses said prices are increasing due to a combination of tariffs impacting supply chains, a lower Canadian dollar, the need to seek new suppliers that are costlier, and a lack of clarity about trade policy making the negotiation of price contracts more difficult.

Many retailers said they expect to be able to rapidly pass on tariff-related price increases to consumers if they are transparent about the reasons for the increases, but said the scale and timing of these increases may be held back by weak demand or competition. Some businesses surveyed said they do not expect to see an increase in costs from tariffs, and a smaller number said they will not pass on higher costs to their consumers.