Bank of Canada cuts interest rate to 2.75% as country faces ‘new crisis’ from tariffs

The Bank of Canada has made a significant decision to cut its overnight lending rate by 25 basis points to 2.75 per cent in response to the ongoing trade war with the U.S. that is starting to strain the Canadian economy. This announcement was made by Bank of Canada governor Tiff Macklem during a press conference on Wednesday.

Macklem explained the rationale behind the rate cut by highlighting the strong start to the year for the Canadian economy, with solid GDP growth and inflation staying within the target range of two per cent. However, he pointed out that the uncertainty caused by the trade war between Canada and the U.S. has negatively impacted business spending and hiring, as well as consumer confidence. This uncertainty led the central bank to make the decision to lower the rate by a quarter point.

The governor emphasized that while it is still early to see the full impact of new tariffs on economic activity, surveys have shown that the threats of tariffs and the uncertainty surrounding the trade relationship between Canada and the U.S. are already affecting business and consumer intentions.

One of the key concerns raised during the press conference was the potential for tariffs to trigger inflation in Canada. Macklem acknowledged that the weak Canadian dollar, retaliatory tariffs, and overall uncertainty in trade policies could lead to increased costs for businesses and ultimately consumers. He assured that the bank would work to ensure that any rise in inflation is temporary.

Despite concerns about the impact of tariffs on economic growth, Macklem refrained from using the word “recession” in his remarks. Deputy governor Carolyn Rogers mentioned that while the outlook for growth may not be optimistic, the bank does not currently have a forecast for a recession.

Macklem also highlighted that Canadian businesses are planning to raise prices to offset the impact of tariffs, which could further fuel inflation. The bank’s preferred measures of core inflation are already above two per cent, driven primarily by housing-related price growth.

In conclusion, Macklem emphasized that while the Bank of Canada cannot shield the economy from the effects of tariffs, it can use interest rates to manage potential inflationary pressures. He warned that the uncertainty and potential impact of new U.S. tariffs could lead to a severe economic crisis, with the uncertainty alone already causing harm to the Canadian economy.