Bank of Canada cuts interest rate to 3% amid trade uncertainty with the United States
The Bank of Canada cut its interest rate by 25 basis points to three per cent on Wednesday, while warning that the economic consequences of a prolonged trade war with the United States could be severe, hindering growth while potentially reigniting inflation.
Bank of Canada governor Tiff Macklem noted that while inflation has held near the bank’s two per cent target since August and household spending is picking up, a trade conflict with the United States has clouded the economic and inflation outlooks.
“A long-lasting and broad-based conflict would badly hurt economic activity in Canada,” Macklem said. “At the same time, the higher cost of imported goods will put direct upward pressure on inflation.”
U.S. President Donald Trump has said he will impose 25 per cent tariffs on Canada and Mexico as early as this Saturday.
The central bank runs through a number of tariff scenarios in its monetary policy report. In its “benchmark calibration,” which assumes price changes in line with patterns observed with previous tariffs, a 25 per cent tariff and subsequent equal retaliation from Canada, would lead to a hit of 2.5 percentage points to Canada’s gross domestic product (GDP) at the end of the first year.
A second scenario assumes there is a larger decline in U.S. demand for Canadian goods, which would lead to a hit of three percentage points to Canadian economic growth. All scenarios would mean an increase in CPI inflation in Canada and the U.S. over a three-year period.
“Unfortunately, tariffs mean economies simply work less efficiently — we produce and earn less than without tariffs,” Macklem said. “Monetary policy cannot offset this. What we can do is help the economy adjust.”
He added the central bank only has one policy
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