Bank of Canada Cuts Rates as Tariff Threat Looms

The Bank of Canada cut its key policy rate by 25 basis points to 2.75%, citing mounting inflationary pressures and weaker growth tied to trade uncertainty and new tariffs from the United States. 

Governor Tiff Macklem stressed that the bank would proceed carefully with future changes, balancing the upward pressure on inflation from rising costs against the downward pull from softer demand. Inflation has hovered near the bank’s 2% target for months, but the recent shift in global trade dynamics has raised new concerns.

This marks the seventh consecutive rate cut in nine months, totaling 225 basis points and making Canada one of the most aggressive central banks globally. Despite ending 2024 on solid economic ground, Macklem acknowledged that the country now faces a new crisis. 

The US imposed a 25% tariff on steel and aluminumproducts, prompting Canada to respond with $20.68 billion in retaliatory tariffs. Macklem warned that a prolonged tariff conflict could hurt GDP growth and push inflation higher, creating a problematic scenario for setting future rates.

What Does This Mean for Me?

The Canadian dollar gained 0.2% following the rate decision, trading at 1.44 to the US dollar. Currency markets are now pricing in a 45% chance of another 25 basis point cut at the bank’s next meeting on April 16. Inflation is expected to hit 2.5% in March, up from 1.9% in January, as a temporary sales-tax break ends.

Macklem emphasized that while monetary policy can’t counter the direct effects of a trade war, it must prevent higher prices from triggering sustained inflation.