The Bank of Canada made a significant move on Wednesday, reducing its key policy rate by 25 basis points to 3%, citing concerns over the impact of U.S. tariffs and persistent inflation. With President Donald Trump’s promise to impose a 25% tariff on all imports from Canada starting Saturday, the Canadian central bank is preparing for potential economic fallout. Canada’s economy is heavily reliant on trade with the U.S., with 75% of all goods and services exports directed south of the border. Bank of Canada Governor Tiff Macklem warned that a protracted trade war could severely hurt Canada’s economic activity, highlighting the risks of inflationary pressures stemming from the tariff hike.
The bank’s decision to lower borrowing costs for the sixth consecutive time was based on sluggish economic growth, despite inflation remaining within the target range. Macklem emphasized that the bank’s monetary policy was aimed at preventing initial price increases from turning into persistent inflation. He also noted that while the bank had been aggressive in its rate cuts, it was facing a difficult challenge: balancing the risks of inflation and growth with a single policy tool.
The Bank of Canada also reduced its growth forecast for 2025, trimming it to 1.8% from 2.1% predicted earlier, and forecasted slower growth in 2026 as well. Along with the rate cut, the bank announced an end to its quantitative tightening program, which had been aimed at reducing excess liquidity in the economy. As Canada faces slower economic growth and potential population declines, the central bank’s next steps will be crucial in navigating the uncertain economic landscape shaped by global trade tensions.
