Bank of Canada cuts interest rate to 2.75% as country faces 'new crisis' from tariffs
CBC
The Bank of Canada has cut its overnight lending rate by 25 basis points to 2.75 per cent, it announced on Wednesday, as an ongoing trade war with the U.S. begins to strain the Canadian economy.
Explaining the decision in his opening remarks, Bank of Canada governor Tiff Macklem said the economy started the year strong, with solid GDP growth and inflation within its two per cent target.
But tariff uncertainty caused by the on-again, off-again trade war between Canada and the U.S. has weighed on business spending and hiring, and shaken consumer confidence, he explained.
It's "against this backdrop" that the central bank decided to cut the rate by a quarter point, Macklem said.
"While it is still too early to see much impact of new tariffs on economic activity, our surveys suggest that threats of new tariffs and uncertainty about the Canada-U.S. trade relationship are already having a big impact on business and consumer intentions," he added.
Macklem also said the bank's surveys show that Canadian businesses intend to raise prices to offset the impact of tariffs.
"The impacts of uncertainty and tariffs on inflation are more difficult to assess. Uncertainty that weighs on household and business spending tends to put downward pressure on inflation," he said.
"And new tariffs will hurt our exports and weaken business investment. But costs are rising, too, and this will put upward pressure on inflation."
Meanwhile, the bank's preferred measures of core inflation are still above two per cent, mainly driven by housing-related price growth.
"Short-term inflation expectations have risen in light of fears about the impact of tariffs on prices," the statement said.
Macklem has warned in the past that the bank cannot shield the Canadian economy from the financial impact of tariffs, but that it can instead use interest rates to manage a potential surge in inflation.
"We're now facing a new crisis. Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe. The uncertainty alone is already causing harm," he said on Wednesday.
