Bank of Canada Lowers Interest Rate in Response to Escalating Trade War with U.S.
Bank of Canada Cuts Rate Amid Escalating U.S.-Canada Trade War
The Bank of Canada has lowered its policy rate by 25 basis points to 2.75% as tensions rise in a renewed trade conflict with the United States.
Overnight, the U.S. imposed 25% tariffs on all Canadian steel and aluminum imports. These metals generated nearly $40 billion in Canadian exports last year. More protectionist measures are anticipated on April 2, when President Donald Trump is set to announce global reciprocal tariffs affecting industries from automobiles to agriculture.
While announcing the rate cut, Bank of Canada Governor Tiff Macklem warned of a “new crisis” and acknowledged that monetary policy alone cannot counteract the economic fallout of a trade war.
“Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe,” Macklem stated, adding that the prevailing uncertainty has already weakened business and consumer confidence.
Despite inflation remaining near the Bank’s 2% target and a 2.6% economic growth in Q4 2024, Macklem cautioned that gains could be derailed by trade instability.
Market Turmoil and Policy Uncertainty
Since Trump’s inauguration, fluctuating tariff policies have rattled markets. This week saw the largest stock drop yet after the president admitted that tariff measures could push the U.S. economy into recession.
On Tuesday, Trump further threatened to double tariffs on Canadian metals. However, Ontario Premier Doug Ford’s reversal of a 25% surcharge on electricity exports to U.S. states helped ease tensions temporarily.
“Moving forward, the trade dispute with the U.S. will likely weigh on economic activity while driving up prices and inflation,” Macklem said.
A prolonged trade war could reduce supply chains, raise consumer prices, and dampen spending. Macklem emphasized that the central bank must carefully assess inflationary pressures from higher costs against slowing demand.
Declining Confidence Among Consumers and Businesses
A Bank of Canada survey conducted from Jan. 29 to Feb. 28 found growing economic concerns among households and businesses. In a survey of 2,500 households, respondents reported increased worries over job security and financial stability, leading to reduced spending plans.
Employment concerns were highest in trade-reliant industries. Workers in mining, oil and gas, and manufacturing sectors felt most vulnerable to job losses. Among 100 businesses surveyed, many downgraded their sales outlooks, with manufacturing hit hardest. Trade uncertainty also led companies to cut hiring and investment plans.
Access to credit has tightened, and the cost of imported equipment has risen, exacerbated by a depreciating Canadian dollar, which has been declining since October 2024.
With U.S. tariffs expanding to China, Mexico, and the European Union, Canadian businesses have few options to offset rising costs. While some firms plan to diversify supply chains, shifting to new suppliers often comes at a higher cost. Half of surveyed businesses indicated they would raise prices if tariffs affected their supply chain or products.
The survey concluded before March 4, when the White House announced an additional 25% tariff linked to Canada’s border security efforts and fentanyl-related concerns. These measures will be reconsidered in April, while tariffs on steel and aluminum remain in effect.
