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 as expected by economists.
In its decision, the Bank of Canada acknowledged recent strength in the economy, but noted that the intensifying trade conflict is weighing on sentiment and activity.
“The pervailing 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 that 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.
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 that Canadians are planning to spend less as they worry about losing their jobs in the trade dispute, particularly in sectors like manufacturing that are vulnerable to tariffs.
Nearly half of businesses in the survey also suggested they’ll be ready to quickly pass on the 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.
The Governor said the central bank 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.
He said the Bank of Canada will use monetary policy to make sure the price shocks from tariffs don’t turn into a lasting bout of inflation.
