Businesses and households struggle with uncertainty as Ottawa responds to US tariffs with countermeasures
Canada’s economy faces potential risks as trade tensions with the US intensify.
According to BNN Bloomberg, ongoing tariff disputes could slow growth and push prices higher, possibly forcing the Bank of Canada to lower interest rates more than planned.
On Wednesday, Ottawa imposed dollar-for-dollar tariffs on US steel and aluminum after US President Donald Trump’s 25 percent tariffs on imports took effect.
In response to economic uncertainty, the Bank of Canada cut its key policy rate by 25 basis points to 2.75 percent.
Governor Tiff Macklem acknowledged signs of stability but warned that the escalating trade conflict threatens economic conditions.
Tiffany Wilding, managing director and North American economist at PIMCO, noted that increasing evidence from surveys shows tariff volatility is creating uncertainty and weakening sentiment.
“When it’s very uncostly to wait to delay hiring decisions, to delay investment, we think that’s going to have an increasing impact on both the United States and Canada,” she told BNN Bloomberg.
She pointed out that the Bank of Canada’s statements reflected these concerns. While businesses face pressure from unpredictable trade policies, they are also passing costs onto consumers.
“We’re basically coming to a system with lower potential growth and a higher price level as a result of all of this,” Wilding added.
The Bank of Canada reported that businesses and households see the current trade environment as unpredictable, with fluctuating tariffs creating uncertainty about timing, scope, and economic impact.
Businesses struggle to determine pricing, investments, and hiring plans, while households worry about job security and financial stability, leading to a decline in spending intentions.
Wilding suggested that a 2.5 percent policy rate “seems like a reasonable level for where they would get and stay” but warned that if tariffs continue to harm the economy, rates may need to drop further.
“To the extent that you have tariffs that are more damaging, I think the risk is certainly they go below that and need to accommodate as a result,” she said.
The deepening trade conflict is raising alarms about the broader economic impact.
Bipan Raj, head of ETF and structured solutions strategy at BMO Global Asset Management, said he was surprised “to a degree” by the economic strain Trump appears willing to impose.
“This is a long-standing trade relationship between the two countries that has been integral to the fundamental structure of each economy,” Raj said.
He called the current situation a “meaningful trade shock” and expressed surprise that policymakers are willing to endure such economic consequences. “It does surprise us to a significant degree that we’re willing to inflict these economic wounds on ourselves,” he added.
Philip Petursson, chief investment strategist at IG Wealth Management, described the Bank of Canada’s rate cut as “a policy adjustment of a different kind.”
In a statement to BNN Bloomberg, he explained that this cut was not a response to inflation concerns or a slowing economy.
“This cut was a direct response to the recently announced tariffs by (US) President Trump,” Petursson said. He noted that while reducing the overnight rate will not eliminate the economic challenges posed by tariffs, the central bank sees its role as offsetting some of the damage.
Petursson suggested that the trajectory of interest rates depends on how long tariffs remain in effect.
“The longer the tariffs remain, the greater the potential damage to the Canadian economy, the lower the overnight rate is likely to go,” he said.
Raj pointed to economic “imbalances” in Canada that could worsen as trade tensions persist. He highlighted high household debt levels and upcoming mortgage refinancings at higher interest rates as key concerns.
He also noted Canada’s heavy reliance on US trade, with 10 percent of the labour force directly tied to it. When including indirect trade links, even more jobs are affected.
“Unfortunately, we could be in a scenario where the unemployment rate does tick up,” Raj said.
He warned that rising unemployment could expose financial vulnerabilities, as heavily indebted households shift their focus toward paying off debt rather than spending.
