BoC lowers key interest rate to 3% amid tariff threats

January 29, 2025 (MLN): Canada’s central bank has cut interest rates for a 6th consecutive time as inflation remains around 2% and the threat of U.S. tariffs looms.

The 25-basis point cut comes as the Bank of Canada forecasts GDP growth will strengthen in 2025 if there is no trade war with the United States, according to BNN Bloomberg.

In his speech to reporters, Bank of Canada Governor Tiff Macklem said while tariffs are top of mind, they were not factors in the rate cut and the monetary policy report (MPR) released today.

“Since scope and duration of a possible trade conflict are impossible to predict, the MPR projection we published today provides a baseline forecast in the absence of tariffs,” said Macklem.

While the threat of tariffs remains a major source of uncertainty, Bank of Canada officials say there are a number of possible scenarios which makes it difficult to assess the economic impacts.

Macklem says a protracted and broad-based trade war would hurt economic activity in Canada with the higher cost of imported goods putting direct upward pressure on inflation.

“Unfortunately, tariffs mean economies simply work less efficiently – we produce and earn less than without tariffs,” Macklem told reporters.

“Monetary policy cannot offset this. What we can do is help the economy adjust", Macklem added.

With inflation back around the 2% target, Macklem says the central bank is in a better position to be a source of economic stability.

The central bank has started looking at the different scenarios and the consequences of a trade war with the United States.

One model in the bank’s monetary policy review presents a scenario where Canada and the U.S. impose 25% tariffs on each other.

In this scenario, GDP in this country would drop by 2.5% in the first year and by 1.5% in the second year.

Based on those numbers, it would put Canada into a recession.

If Canada and the U.S. both impose 25% tariffs on each other, the bank’s MPR predicts lower GDP growth and higher inflation in both countries.

The bank believes a trade conflict would have a negative impact on both exports and imports in Canada.

The bank predicts 25% tariffs would worsen Canada’s trade balance and could lead to a depreciation of the Canadian dollar.

With less demand for Canadian goods, exporters could lower production and lay off workers.

That resulting decline in business investment could significantly reduce GDP in Canada.

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