OTTAWA: The Bank of Canada on Wednesday trimmed its key policy rate by 25 basis points to 2.75% and warned of “a new crisis” as it tried to prepare the economy for the damage that President Donald Trump’s tariffs could wreak.
The Bank also said it would “proceed carefully with any further changes” to rates given the need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.
The cut marked the seventh consecutive time the central bank has eased monetary policy, shrinking the key rate by a total of 225 basis points in a space of nine months and making it one of the most aggressive central banks globally.
“We ended 2024 on a solid economic footing. But we’re now facing a new crisis,” Governor Tiff Macklem said in opening remarks to a press conference.
“Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe. The uncertainty alone is already causing harm,” he said.
Trump’s stop-start tariff policies and threats to a wide range of Canadian products have alarmed companies, shaken consumer confidence and hurt business investment.
The Bank says a protracted tariff war would lead to poor GDP growth and high prices, a challenging mix that makes it tough to decide on whether to hike or cut rates.
The rate-setting Governing Council will focus on assessing the timing and strength of both the downward pressure on inflation from a weaker economy and the upward pressure from higher costs, Macklem said.
The trade conflict would slow first quarter GDP and could possibly disrupt the recovery in the jobs and market, he said, adding that the fear of the impact of tariffs on prices had already pushed up short-term inflation expectations.
Inflation is expected to be around 2.5% in March, up from 1.9% in January, as a short term sales tax break ends.
Special survey
The U.S. is Canada’s biggest trading partner and takes almost 75% of all Canadian exports.
A separate special bank survey of businesses and households, conducted from late January till end of February, showed many households were concerned about job security, especially in sectors exposed to the U.S. trade.
The tariff threat has forced business to lower their sales outlook. Some businesses are finding it hard to get credit to get credit, and a weaker currency has made imports expensive, the survey pointed out.
This means firms are pulling back their hiring and investment plans, it said.
The recent shift in consumer and business intentions is expected to translate into a marked slowing in domestic demand in the first quarter, Macklem said in his remarks.
“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,” he said.
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