The Bank of Canada (BOC) announced a 25-basis-point reduction in its key policy rate, lowering it to 3 percent in response to growing economic uncertainties fueled by a potential trade conflict with the United States, Al Jazeera reports.
This marks the sixth consecutive cut by the central bank, aimed at stimulating sluggish economic growth.
In remarks made at a news conference, BOC Governor Tiff Macklem highlighted the damaging impact a prolonged trade war could have on the Canadian economy. With President Donald Trump threatening to impose a 25 percent tariff on all imports from Canada, Macklem emphasized that such a conflict could severely hinder economic activity. Currently, an estimated 75 percent of Canada’s goods and services exports are sent to the US.
The Bank of Canada warned that retaliatory tariffs from Canada and other nations could further exacerbate economic woes, potentially reducing Canadian growth by 2.5 percentage points in the first year and an additional 1.5 percentage points in the second year. However, the bank clarified that these projections are hypothetical scenarios and not formal forecasts.
Despite inflation remaining within the BOC’s target range of 1-3 percent, the bank has struggled to foster robust economic growth. Following the announcement, the Canadian dollar dropped by 0.3 percent, trading at 1.44 against the US dollar.
The Bank of Canada faces a complex challenge: US tariffs could simultaneously drive up inflation and inhibit growth, creating a difficult dilemma regarding interest rate policy. Current money market indicators suggest a greater than 43 percent likelihood of another rate cut at the BOC’s next monetary policy announcement on March 12.
Additionally, the central bank revealed plans to conclude its quantitative tightening program, implemented to reduce excess liquidity brought on by pandemic-related measures, by March.
The BOC has revised its economic growth projections, lowering the forecast for 2025 to 1.8 percent from 2.1 percent, and for 2026 to 1.8 percent from 2.3 percent. Inflation expectations have also been adjusted upward, with forecasts raised to 2.3 percent from 2.2 percent for 2025 and to 2.1 percent from 2 percent for 2026. Notably, these projections do not account for the potential impact of US tariffs.
Canada’s economy has faced ongoing challenges, contracting on a per-capita basis for the past six quarters. Most observed growth has been attributable to population increases, but with new federal immigration restrictions in place, projections estimate a 0.2 percent population decline for both 2025 and 2026.
