Bank of Canada cuts key rate to 3% as inflation remains at 2 per cent
Canada’s central bank has cut interest rates for a sixth consecutive time as inflation remains around two per cent and the threat of U.S. tariffs looms.
The 25-basis point cut comes as the Bank of Canada forecasts GDP growth will strengthen in 2025 if there is no trade war with the United States.
In his speech to reporters, Bank of Canada Governor Tiff Macklem said while tariffs are top of mind, they were not factors in the rate cut and the monetary policy report (MPR) released today.
“Since scope and duration of a possible trade conflict are impossible to predict, the MPR projection we published today provides a baseline forecast in the absence of tariffs,” said Macklem.
While the threat of tariffs remains a major source of uncertainty, Bank of Canada officials say there are a number of possible scenarios which makes it difficult to assess the economic impacts.
Macklem says a protracted and broad-based trade war would hurt economic activity in Canada with the higher cost of imported goods putting direct upward pressure on inflation.
“Unfortunately, tariffs mean economies simply work less efficiently – we produce and earn less than without tariffs,” Macklem told reporters. “Monetary policy cannot offset this. What we can do is help the economy adjust.”
With inflation back around the two per cent target, Macklem says the central bank is in a better position to be a source of economic stability.
What could tariffs do?
The central bank has started looking at the different scenarios and the consequences of a trade war with the United States.
One model presented in the bank’s monetary policy review shows a scenario where 25 per cent tariffs applied by both Canada and the U.S. would result in a 2.5 per cent drop of GDP in this country in the first year and a 1.5 per cent drop in GDP in the second year.
Based on those numbers, it would put Canada into a recession.
If Canada and the U.S. both impose 25 per cent tariffs on each other, the bank’s MPR predicts lower GDP growth and higher inflation in both countries. The bank believes a trade conflict would have a negative impact on both exports and imports in Canada.
The bank predicts 25 per cent tariffs would worsen Canada’s trade balance and could lead to a depreciation of the Canadian dollar.
With less demand for Canadian goods, exporters could lower production and lay off workers. That resulting decline in business investment could significantly reduce GDP in Canada.
This article was first reported by CTV News
