Bank of Canada eases key rate amid rising tariff tensions

By Elnur Mirzazada
March 13, 2025 07:16
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Reuters

The Bank of Canada trimmed its key policy rate by 25 basis points on Wednesday, lowering it to 2.75%, as concerns mount over inflationary pressures and weaker economic growth driven by renewed trade uncertainties and tariff threats.

Governor Tiff Macklem stated at a press conference that the bank remains vigilant in weighing the upward pressures on inflation from higher costs against the downward pressures from a slowing economy. “We’re focused on weighing those downward pressures and those upward pressures. Our job is to maintain price stability, and that’s what we’re focused on,” he said, adding that the central bank would “proceed carefully with any further changes” to rates. Macklem declined to provide forward guidance on future rate adjustments.

This rate cut marks the seventh consecutive easing of monetary policy by the Bank of Canada, totaling 225 basis points over the past nine months, positioning it among the most aggressive central banks globally in its recent approach to managing inflation, which has hovered at or around the 2% target. “We ended 2024 on a solid economic footing. But we’re now facing a new crisis,” Macklem noted in his opening remarks.

The decision comes against the backdrop of escalating trade tensions. President Donald Trump’s stop-start tariff policies have reignited concerns over trade with Canada. On Wednesday, Trump imposed a 25% tariff on all steel and aluminum products, prompting Canada to announce retaliatory tariffs valued at C$29.8 billion (approximately $20.68 billion) effective Thursday. Macklem warned that a prolonged tariff war could result in sluggish GDP growth and persistently high prices, complicating future monetary policy decisions.

In response to the tightening trade conflict, the bank’s rate-setting Governing Council will continue to monitor both the dampening effects on demand from a weaker economy and the inflationary impact of higher costs. Short-term inflation is expected to rise, with forecasts around 2.5% in March, up from 1.9% in January, partly due to the end of a recent sales-tax break.

Financial markets reacted to the decision, with the Canadian dollar extending gains—trading at approximately 1.4403 per U.S. dollar—and yields on two-year government bonds falling by 0.8 basis points to 2.521%. Meanwhile, currency markets are pricing in roughly a 45% chance of another 25 basis point rate cut at the bank’s next meeting on April 16. “The focus on rising inflation expectations in today’s release is somewhat hawkish,” said Royce Mendes, head of macro strategy at Desjardins Group.

The ongoing trade tensions have taken a toll on business and consumer sentiment. A recent survey revealed that many Canadian households are increasingly worried about job security, particularly in sectors most exposed to U.S. trade disruptions, while businesses are scaling back hiring and investment plans due to tighter credit and rising import costs. Macklem acknowledged that these shifts are expected to lead to a marked slowdown in domestic demand in the first quarter, emphasizing that “monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation.”

With the United States accounting for nearly 75% of all Canadian exports, the evolving trade conflict underscores the interconnectedness of global economic policy and the challenges central banks face in balancing domestic stability with international pressures.

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