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.
Bank of Canada governor Tiff Macklem, who cut the bank’s key interest rate on Wednesday to 2.75 per cent, says trade conflict with the U.S. can be expected to ‘weigh on economic activity, while also increasing prices and inflation.’
Macklem explains why tariffs could trigger inflation
Asked what kind of inflationary impacts Canada faces, Macklem said during the Q&A with reporters that “given the pervasive uncertainty and unpredictability of U.S. trade policy, I can’t put a number on it.”
Several factors could contribute to inflation, he said. The weak Canadian dollar poses a challenge to importers, because it means the products they bring in will be more expensive; retaliatory tariffs imposed by Canada will also add costs; and uncertainty itself adds costs, because businesses are looking for new suppliers and new markets to sustain themselves.
“Somebody has to pay for these costs and, ultimately, they get passed to the consumer,” he explained. “What we can do is ensure that any rise in inflation is temporary.”
As one reporter pointed out, Macklem never used the word recession in his remarks, which some economists have said is likely for Canada given the impact that tariffs will have on growth.
As for whether a recession is imminent, deputy governor Carolyn Rogers said the bank doesn’t have a forecast at this point. “All of those things don’t bode well for growth, but we’ll see,” she said.
‘We’re now facing a new crisis’
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, adding to its concerns.
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.