Tariff uncertainty hangs over Bank of Canada’s 1st rate decision of 2025
The Bank of Canada is being pulled in a few different directions ahead of its first interest rate decision of the year on Wednesday.
On one hand, there are signs of trouble bubbling up in underlying inflation that could make an argument for keeping borrowing costs higher for longer.
On the other: fears of a trade war with the United States. President Donald Trump has reiterated threats to impose tariffs of 25 per cent on Canadian goods that could be set to take effect mere days after the central bank’s rate decision.
“If Trump were to carry out those 25 per cent tariffs, and they were in place for some time, unfortunately a recession in Canada would be inevitable,” says Stephen Brown, deputy chief North America economist at Capital Economics.
A trade blow like that would normally push the Bank of Canada towards steeper rate cuts in a bid to salvage economic growth. But dropping rates too quickly at a time when the loonie is already struggling risks fuelling more inflation on imports from south of the border.
What’s a central bank to do?
Economists who spoke to Global News say they’re betting the Bank of Canada will go ahead with another cut to its benchmark interest rate on Wednesday, albeit a smaller one than in the central bank’s recent outings.
The Bank of Canada’s benchmark interest rate broadly sets the cost of borrowing across the country and acts as a signal for rates Canadian gets on key loans like home mortgages.
The central bank has cut its policy rate a total of 1.75 percentage points in five consecutive decisions, trimming by 50 basis points in October and December amid signs of weakness in the economy and growing fears that inflation could drop too far below the two per cent target.
The policy rate now
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