The Bank of Canada has reduced its overnight lending rate by 25 basis points to 2.75%, citing mounting economic uncertainty caused by ongoing trade tensions with the United States.
In his announcement, Governor Tiff Macklem acknowledged that the economy had started the year on strong footing, with solid GDP growth and inflation remaining within the Bank’s 2% target. However, he emphasized that uncertainty surrounding tariffs has led to a decline in business investment and consumer confidence, particularly in the manufacturing sector.
Impact of Trade War on the Economy
The decision to cut the interest rate comes as Canadian businesses brace for the economic fallout from escalating U.S. tariffs. Many companies have already adjusted their sales forecasts downward, anticipating disruptions in trade.
“While the full impact of new tariffs on economic activity is yet to be seen, our research indicates that uncertainty surrounding the Canada-U.S. trade relationship is already influencing business and consumer decisions,” Macklem stated.
Despite the challenges, Macklem noted that a short-term surge in exports ahead of the tariffs could provide some relief to economic growth.
Addressing Inflation and Business Costs
According to the Bank’s internal analysis, Canadian businesses are likely to raise prices to counter the rising costs associated with tariffs. This poses a unique challenge, as reduced consumer and business spending typically lowers inflation, while increased import costs could push it higher.
“We’re facing a new crisis,” Macklem warned. “The severity of the economic impact will depend on the extent and duration of the tariffs, but even the uncertainty alone is already causing harm.”
The Bank of Canada has acknowledged that while it cannot directly shield the economy from the financial strain of tariffs, it can use interest rate adjustments to help manage inflationary pressures.
Future Economic Outlook
Despite growing concerns, Macklem avoided using the term "recession" in his remarks. When asked whether Canada is at risk of an economic downturn, Deputy Governor Carolyn Rogers stated that the Bank has yet to release a formal forecast.
Economists are closely monitoring the situation, with some predicting further rate cuts in the coming months. BMO Chief Economist Douglas Porter suggested that the Bank of Canada is likely to continue lowering rates, expecting a 25 basis point reduction at each of the next three policy meetings, which could bring the rate down to 2%.
The Bank of Canada’s next interest rate announcement is scheduled for April 16, alongside the release of its quarterly monetary policy report, which will provide further insight into the economic outlook.
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