Bank of Canada cuts interest rate to 2.75% as governor paints bleak economic future with trade war

The cant of Canada has skip its overnight loaning value by 25 base points to 2.75 per cent, it announced on Wednesday, as an ongoing trade war with the U.S. Begins to strain the Canadian economy.

Explaining the decision in his opening remarks, Bank of Canada governor Tiff Macklem said the economy started the year strong, with solid GDP growth and inflation within its two per cent target.

But tariff uncertainty caused by the on-again, off-again trade war between Canada and the U.S. Has weighed on business spending and hiring, and shaken consumer confidence, he said. Manufacturing businesses in particular have lowered their sales outlooks.

It's "against this backdrop" that the central bank decided to cut the rate by a quarter point, according to Macklem, though he added that a surge in exports ahead of the tariffs might offset a slowdown in growth.

"While it is still too early to see much impact of new tariffs on economic activity, our surveys suggest that threats of new tariffs and uncertainty about the Canada-U.S. Trade relationship are already having a big impact on business and consumer intentions," he said during his Wednesday news conference.

Bank of Canada cuts key rate, cites 'pervasive uncertainty' of U.S. Tariff threats

It's the seventh consecutive cut the Bank has made since it started bringing rates down in June 2024.

"They're clearly worried that an economy that was otherwise in pretty good shape and wouldn't have needed a rate cut now needs this one, and perhaps more, given the potential shock from higher tariffs and what that's going to do to the Canadian economy in the near term," said Avery Shenfeld, chief economist at CIBC.

The bank's internal research shows that Canadian businesses intend to raise prices to offset the impact of tariffs. As Macklem noted, less spending by businesses and consumers tends to put downward pressure on inflation. But rising costs could trigger it.

"We're now facing a new crisis. Depending on the extent and duration of new U.S. Tariffs, the economic impact could be severe. The uncertainty alone is already causing harm," he said on Wednesday.

Macklem has warned in the past that the bank cannot shield the Canadian economy from the financial impact of tariffs, but that it can instead use interest rates to manage a potential surge in inflation.

Tiff Macklem outlines what tariffs could mean for inflation in Canada

Meanwhile, the bank's preferred measures of core inflation are still above two per cent, mainly driven by housing-related price growth, adding to its concerns.

Asked what kind of inflationary impacts Canada faces, Macklem said during the Q&A with reporters that "given the pervasive uncertainty and unpredictability of U.S. Trade policy, I can't put a number on it."

Several factors could contribute to inflation, he said. The weak Canadian dollar poses a challenge to importers, because it means the products they bring in will be more expensive; retaliatory tariffs imposed by Canada will also add costs; and uncertainty itself adds costs, because businesses are looking for new suppliers and new markets to sustain themselves.

"Somebody has to pay for these costs and, ultimately, they get passed to the consumer," he explained. "What we can do is ensure that any rise in inflation is temporary." 

As one reporter pointed out, Macklem never used the word recession in his remarks, which some economists have said is a likely outcome given that tariffs will hamper growth.

As for whether a recession is imminent, deputy governor Carolyn Rogers said the bank doesn't have a forecast at this point. "All of those things don't bode well for growth, but we'll see," she said.

The Bank of Canada's next interest rate meeting is on April 16, at which point it will also release its quarterly monetary policy report to assess the outlook for the Canadian economy.

BMO chief economist Douglas Porter wrote in a note to clients that any future interest rate decisions "will be largely guided by the direction of travel in the trade war, although we suspect the Bank was headed a bit lower in any event."

"Our core assumption is that Canada will be facing some serious tariffs for an extended period of time and that the growth dampening aspects of the trade war will ultimately outweigh the upside inflationary impact, keeping the Bank in easing mode," Porter wrote.

He expects the Bank will make a 25 basis point cut at each of its next three meetings, bringing the overnight lending rate to two per cent.

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