The Bank of Canada reduced its benchmark rate by 0.25% and removed future rate guidance amid uncertainty caused by US tariff threats.
Tariff Threats and Bank's Decision
On Wednesday, led by Governor Tiff Macklem, the Bank of Canada lowered the overnight rate to 3%, as anticipated by markets and economists. This reduction is part of a series of cutbacks that began in October and December. In its statement, the bank noted that the economy is expected to strengthen gradually, and inflation will stay close to target. However, if broad-based and significant tariffs were imposed, Canada's economic resilience would be tested.
Impact on Economy and Inflation
Trump had earlier threatened to raise tariffs on various countries, including Canada, which negatively affects the country's economy and clouds the economic outlook. Macklem pointed out that despite price stabilization, a broad trade conflict could negatively impact economic activity. Additionally, he noted that the higher cost of goods puts direct upward pressure on inflation, and evaluating the impact of inflation will be important to compare it with the upward pressure from higher input prices and supply chain disruptions.
Economic Growth Forecast for 2025 and 2026
The central bank’s fiscal policy report forecasted slow economic growth for 2025 and 2026 due to lower immigration targets and other factors. The growth is expected to be 1.8% in 2025 and 2026, lower than the previously forecasted 2.1% and 2.3%. Meanwhile, the bank raised its expectations for consumer spending and plans to conclude quantitative easing on March 5 to manage its balance sheet.
The Bank of Canada's rate cut and lack of guidance reflect economic uncertainty caused by US tariff threats. These measures are expected to stabilize the market as the country braces for potential economic challenges.
