The Bank of Canada has reduced its overnight lending rate by 25 basis points to 2.75%, citing the growing strain on the Canadian economy due to ongoing trade tensions with the United States.
In his opening remarks, Governor Tiff Macklem explained that the economy had started the year on a strong note, with steady GDP growth and inflation aligning with the 2% target. However, uncertainty surrounding the fluctuating trade relationship between Canada and the US has negatively impacted business investment, hiring, and consumer confidence. The manufacturing sector, in particular, has lowered its sales forecasts due to these concerns.
Given this economic landscape, the central bank decided to implement a quarter-point rate cut. Macklem noted that while it remains too early to fully assess the impact of new tariffs, surveys indicate that the uncertainty surrounding trade policies is already affecting business and consumer decisions. He added that a surge in exports ahead of the tariffs could help counterbalance slower economic growth.
“While we have yet to see significant economic effects from the tariffs, the uncertainty surrounding potential new trade restrictions is already influencing spending and investment decisions,” Macklem stated during a press conference on Wednesday.
This marks the seventh consecutive rate cut since the central bank began easing monetary policy in June 2024. Analysts suggest that the decision reflects concerns that the economy, which was previously stable, now requires additional support due to the potential disruptions caused by higher tariffs.
Following the announcement, major financial institutions adjusted their prime lending rates downward by 25 basis points.
A growing economic challenge
Internal research from the central bank indicates that businesses plan to increase prices to offset the effects of tariffs. While reduced business and consumer spending can lower inflation, rising costs could exert upward pressure.
“We are now confronting a new economic challenge. Depending on the scale and duration of US tariffs, the consequences could be significant. Even the uncertainty itself is already proving to be detrimental,” Macklem said.
Although the Bank of Canada cannot directly shield the economy from the financial impact of tariffs, it can use interest rate adjustments to manage inflationary pressures. Core inflation remains above 2%, largely driven by housing-related costs, further complicating the situation.
When asked about potential inflationary effects, Macklem acknowledged the unpredictability of US trade policies, making precise projections difficult. Several factors contribute to inflation, including a weaker Canadian dollar, increased costs from retaliatory tariffs, and the expenses businesses incur when seeking alternative suppliers and markets.
“Ultimately, these additional costs are passed on to consumers,” he explained. “Our goal is to ensure that any inflationary pressures remain temporary.”
Assessing the risk of a recession
Despite economic concerns, Macklem did not mention the possibility of a recession in his remarks. When questioned, Deputy Governor Carolyn Rogers stated that the bank does not currently have a recession forecast but acknowledged that the prevailing economic conditions are unfavorable for growth.
The Bank of Canada is set to hold its next interest rate meeting on April 16, during which it will release its quarterly monetary policy report to evaluate the nation’s economic outlook.
Future interest rate decisions will likely depend on the trajectory of trade relations. Economic analysts anticipate that ongoing tariff challenges will dampen growth, ultimately leading the central bank to continue its easing measures. Projections suggest that the overnight lending rate could be reduced further to 2% over the next threepolicy meetings.
