BoC cuts key interest rate to 3% as tariff threats loom

The Bank of Canada has cut interest rates by 0.25 percentage points, the sixth consecutive cut, as inflation remains around 2% and the threat of U.S. trade tariffs remains.

The rate cut is part of the Bank of Canada’s forecast that gross domestic product (GDP) growth will strengthen in 2025, assuming there is no trade war with the United States.

Bank of Canada Governor Taft McCallum told reporters that while tariffs are a priority, those threats were not the reason for the rate cut and the report released today.

“Because the scope and duration of a potential trade war are unpredictable, the projections we released today in the Monetary Policy Report are based on a scenario that assumes tariffs are not imposed,” he added.

While the threat of tariffs remains a major source of uncertainty, Bank of Canada officials say there are a variety of scenarios that make it difficult to assess the economic impact.

In the event of a prolonged and widespread trade war, economic activity in Canada would be affected, and higher costs for imported goods would put upward pressure on inflation.

“Unfortunately, tariffs cause economies to not function as efficiently and we produce and earn less than we should. Monetary policy cannot compensate for that. What we can do is help the economy adjust,” he added.

With inflation back at its 2 per cent target, McCallum says the central bank is now in a better position to provide economic stability.

What impact might tariffs have?

The central bank has begun examining different scenarios and the implications of a trade war with the United States.

One model presented in the Monetary Policy Report suggests that if both Canada and the United States impose a 25% tariff on each other, Canadian GDP would fall by 2.5% in the first year and by 1.5% in the second.

This would likely push Canada into a recession.

If both Canada and the United States impose a 25% tariff on each other, the central bank predicts that GDP growth in both countries would decline and inflation would rise. The central bank believes that a trade war would have a negative impact on both exports and imports in Canada.

These projections suggest that a 25% tariff could worsen Canada’s trade balance and cause the Canadian dollar to depreciate.

As demand for Canadian goods declines, exporters may cut back on production and lose jobs. This reduction in business investment could have a major impact on Canada’s GDP.

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