OTTAWA — The Bank of Canada lowered its benchmark interest rate by a quarter point on Wednesday as the tariff battle with the United States starts to weigh on the Canadian economy.
The policy rate stands at 2.75 per cent after the central bank’s seventh consecutive rate cut.
The move was widely expected by economists.
Bank of Canada governor Tiff Macklem said in prepared remarks Wednesday that signs of stability in inflation and momentum in the Canadian economy driven by previous rate cuts are at risk amid the trade war with the U.S.
“The pervasive uncertainty created by continuously changing U.S. tariff threats has shaken business and consumer confidence,” he said.
“The uncertainty alone is already causing harm.”
Macklem warned the economic damage could be “severe,” depending on how steep tariffs are and how long they’re kept in place. He said that, if the dispute continues, growth in the second quarter of 2025 would take a hit.
Avery Shenfeld, chief economist with CIBC Capital Markets, said in a note to clients on Wednesday that evidence Canada's economy was heating up heading into 2025 likely would've been enough for the central bank to take a "wait-and-see approach" on further cuts — but then came the trade war.
U.S. President Donald Trump delivered on weeks of tariff threats against Canada on March 4, though those import duties have already shifted with a series of adjustments, delays and reversals.
Wednesday marks the next phase of Trump’s tariff agenda; 25 per cent tariffs on imports of Canadian steel and aluminum entering the U.S. took effect just after midnight.
Canada announced it would hit back with retaliatory tariffs the same morning.
Macklem said that Canadians can expect to pay more in the months ahead because of the trade dispute, first hitting perishable foods like fresh fruit and vegetables from the U.S. while durable goods with longer production cycles could see costs rise later.
"The reality is, some prices are going to go up. We can't change that," he told reporters in a press conference Wednesday.
The Bank of Canada’s latest interest rate announcement came alongside a supplemental survey of consumers and businesses specifically reacting to the spectre of tariffs from late January through February.
That data suggested Canadians are planning to spend less as they worry about losing their jobs because of the trade dispute, particularly in sectors like manufacturing that are vulnerable to tariffs.
Some 40 per cent of business leaders surveyed by the central bank said they're scaling back hiring plans.
Bank of Canada senior deputy governor Carolyn Rogers did not provide a direct response when asked if the bank thought the economy was heading for a recession and pointed to revised forecasts set for release alongside the next rate decision on April 16.
But she said the "sentiment has turned quite sharply" among consumers and businesses.
"What businesses are telling us is, they're slowing investment, they're slowing hiring. Canadians are saving more, spending less. So all of those things don't bode well for growth," Rogers said.
"The short answer to that question is, it's going to depend a lot on what the U.S. does with their trade policy. We'll have to see." Macklem added.
Lower demand from Canadians gripping their wallets a bit tighter could dampen pressures on inflation, the Bank of Canada said.
But nearly half of businesses in the survey also suggested they’ll be ready to quickly pass on higher costs tied to tariffs onto consumers, especially if they’re transparent with consumers about why prices are rising.
Inflation expectations are rising among both businesses and consumers, the Bank of Canada noted, a trend that can feed into inflation itself if left unchecked.
Macklem said the bank will use monetary policy to make sure the price shocks from tariffs don’t turn into a lasting bout of inflation.
He said the central bank cannot offer forward guidance amid the uncertainty and will “proceed carefully” with future rate changes as it weighs both the drag on economic growth and upward pressures in prices tied to the trade war.
Shenfeld said he expects the central bank will put more weight on growth risks than inflation in the short-term, leaving room for two more interest rate cuts by June.
This report by The Canadian Press was first published March 12, 2025.
Craig Lord, The Canadian Press
