Ongoing US-Canada trade war was key reason for BoC's decision
The Bank of Canada has unveiled their key interest rate decision for March, lowering the benchmark by 25 basis points to 2.75 per cent.
The decision comes to no surprise among economists’ expectations as the BoC’s decision to cut comes amid ongoing trade tensions and global economic concerns.
“Heightened trade tensions and tariffs imposed by the United States will likely slow the pace of economic activity and increase inflationary pressures in Canada. The economic outlook continues to be subject to more-than-usual uncertainty because of the rapidly evolving policy landscape,” a press release announcing the decision reads.
Prior to Wednesday’s announcement, experts had said the central bank faces a difficult balancing act as inflation has hovered around its 2 per cent target but underlying price pressures remain near the upper end of its 1 to 3 per cent control band.
Additionally, Canada’s economy showed resilience in late 2024, with GDP expanding at an annualized rate of 2.6 per cent in Q4, outpacing market expectations.
Revised Q3 figures also pointed to stronger-than-anticipated growth, bolstered by previous rate cuts. However, the February jobs report signalled cracks in the labour market, with only 1,100 jobs added and unemployment holding at 6.6 per cent.
Despite these mixed signals, Tiff Macklem, governor of the Bank of Canada previously emphasized that monetary policy alone can’t offset trade disruptions.
“The economic consequences of a protracted trade conflict would be severe… In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened. If tariffs are long-lasting and broad-based, there won’t be a bounce-back. We may eventually regain our current rate of growth, but the level of output would be permanently lower,” he said in a speech to the Mississauga Board of Trade and the Oakville Chamber of Commerce on Feb. 21.
“It’s more than a shock, it’s a structural change,” he warned.
Macklem further warned that a prolonged trade conflict could lead to an 8.5 per cent decline in exports, a 12 per cent drop in business investment, and a 2 per cent contraction in consumer spending, ultimately shaving 3 per cent off Canada’s GDP over the next two years, adding the projection implies tariffs “would all but wipe out growth in the economy for those two years.”
While the federal government is expected to take the lead in mitigating the fallout through fiscal measures, the BoC will likely continue easing policy to support domestic demand.
However, cutting too aggressively risks a depreciation of the Canadian dollar, which could push up inflation for imported goods.
“The Canadian dollar is broadly unchanged against the US dollar but weaker against other currencies” stated the release. “Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation.”
US President Donald Trump planned to hit Canada with a 50 per cent tariff to aluminium and steel exports Wednesday in an act of retaliation against Ontario Premier Doug Ford’s 25 per cent tariffs on energy sectors in the US, particularly those closest to Canadian borders, including Michigan, New York and Minnesota.
Both Ford and Trump backed down from their tariff threats late Tuesday afternoon after coming to an agreement that the Ontario premier would meet with US Secretary of Commerce Howard Lutnick on Thursday to discuss a “renewed” Canada-United States-Mexico Agreement (CUSMA) ahead of Trump’s April 2 reciprocal tariff deadline.
