Bank of Canada Cuts Interest Rates to 3%
Canada’s central bank has announced its sixth consecutive interest rate cut, reducing rates by 25 basis points as inflation holds steady around two percent and the threat of U.S. tariffs continues to cast a shadow over the economy. The Bank of Canada projects that GDP growth could strengthen in 2025, but only if a trade war with the United States is avoided.
In a press conference, Bank of Canada Governor Tiff Macklem emphasized that while tariffs remain a significant concern, they were not the primary factor behind the rate cut or the latest monetary policy report (MPR). “The scope and duration of a potential trade conflict are impossible to predict, so our MPR provides a baseline forecast assuming no tariffs,” Macklem explained.
However, the threat of tariffs has created considerable economic uncertainty. Macklem warned that a prolonged and widespread trade war would harm Canada’s economic activity, with higher costs for imported goods directly pushing inflation upward. “Tariffs make economies less efficient—we produce and earn less than we would without them,” he said. “Monetary policy can’t offset this, but it can help the economy adjust.”
With inflation now stabilizing around the two percent target, the Bank of Canada is better positioned to provide economic stability. Yet, the potential impacts of a trade war remain a critical issue. The Bank has analyzed various scenarios, including one where both Canada and the U.S. impose 25 percent tariffs on each other. In this case, Canada’s GDP could drop by 2.5 percent in the first year and 1.5 percent in the second year, potentially pushing the country into a recession.
The Bank’s MPR also predicts that such tariffs would lead to lower GDP growth and higher inflation in both Canada and the U.S. A trade conflict would likely worsen Canada’s trade balance, reduce demand for Canadian goods, and lead to a depreciation of the Canadian dollar. Exporters might cut production and lay off workers, while declining business investment could further drag down GDP.
As the situation unfolds, the Bank of Canada remains focused on supporting the economy through its monetary policy tools. However, the uncertainty surrounding trade tensions underscores the need for careful planning and adaptability in the face of potential economic challenges.
Stay tuned for more updates and insights on how these developments may impact your financial decisions.
More to Come.
The next interest rate decision will be announced on March 12, 2025, alongside the Bank’s updated economic and inflation outlook in the Monetary Policy Report (MPR).
Sourced By: Bank Of Canada, Press Release
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