Bank of Canada Cuts Rates, to Move ‘Carefully’ Amid Tariffs
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Bank of Canada Cuts Rates, to Move ‘Carefully’ Amid Tariffs
Erik Hertzberg and Randy Thanthong-Knight
5 min read
(Bloomberg) -- The Bank of Canada cut interest rates by a quarter percentage point and called the trade battle with the US a “new crisis,” but pushed back on expectations that policymakers were on a predetermined cutting path.
Policymakers led by Governor Tiff Macklem lowered the policy rate to 2.75% on Wednesday, the lowest level since September 2022. The cut was widely expected by both markets and economists in a Bloomberg survey.
“We’re now facing a new crisis. Depending on the extent and duration of new US tariffs, the economic impact could be severe,” Macklem said in his prepared remarks.
Macklem called the uncertainty of the tariff dispute “pervasive” and said that it was “already causing harm.” Officials said the “continuously changing” US tariff threat was hitting consumers’ spending intentions and limiting businesses’ plans to hire and invest.
At the same time, Macklem said the bank “will proceed carefully with any further changes” to borrowing costs, and officials would “need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.”
The Canadian dollar curbed its gains after the rate cut. It was trading 0.1% up near C$1.4420 per US dollar. Bonds sold off after the release and yields on the government of Canada 2-year note rose to 2.525%.
Policymakers also reiterated that there’s a limit to how much they think they can intervene. The tariff battle will come with an inflation shock, the bank said, and it will “be tracing the impact of cost pressures through to consumer prices.”
“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.”
Combined, the communications and 25 basis-point cut confirm the central bank has pivoted to offering some help to the Canadian economy amid the potentially severe damage posed by US President Donald Trump’s volatile tariff barrage. Still, officials made it clear that their response is likely to be limited compared with the Covid-19 pandemic, when the policy rate fell to 0.25%.
In the final paragraph of the statement, officials added that they would be monitoring inflation expectations closely. A new survey completed by the bank showed expectations have risen as consumers see tariffs raising prices.
“Keeping medium- and longer-term inflation expectations well anchored is imperative to ensure any rise in inflation is temporary,” the bank said.
Policymakers also called the growth path for the Canadian economy “considerably stronger” than officials were expecting at the end of last year and noted both faster-than-expected growth in the fourth quarter and upward revisions. Policymakers said their rate cuts were helping to boost consumption and housing.
Officials noted that the tariff war threatens the country’s employment picture, which has recovered in recent months amid boosted labor demand.
“There are warning signs that heightened trade tensions could disrupt the recovery in the jobs market,” the bank said in the statement.
In a news conference following the decision, Macklem said the uncertainty means the central bank cannot provide forward guidance.
The bank is in a “terrible situation,” said Rishi Mishra, an analyst at Futures First Canada Inc, in an email. “They are hoping that growth concerns are taken care of by stimulus from the government, and the Bank of Canada can take care of inflation concerns. But there is just no good way out,” he said.
Wednesday’s cut “might only be a Band-Aid, but we don’t yet know the size of the economic wound that will be opened up by US trade policy ahead,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors.
“Our judgment is that the downward pressure on prices from increased slack and weaker household spending power would leave growth risks, rather than inflation, as the dominant story for monetary policy, allowing the bank to deliver two more quarter point cuts by June.”
Stephen Brown, deputy chief North America economist at Capital Economics, said the bank is hesitant to commit to much more in the way of policy support.
“As price changes tend to follow changes in demand with a lag, whereas tariff-related price hikes will be more immediate, this raises the risk that the bank will be slower to lower interest rates from here than we have assumed,” he told investors.
Retaliation Impacts
Trump imposed 25% levies on most Canadian and Mexican goods last week, but then promised a one-month delay on those that comply with the North American trade agreement. He then threatened major new tariffs against Canadian lumber and dairy. Tariffs of 25% on Canadian steel and aluminum came into effect Wednesday morning.
Canada has retaliated, putting levies on C$30 billion ($20.8 billion) in US goods on March 4 and announcing an additional C$30 billion in tariffs on Wednesday. The northern nation still has a wider set of retaliatory tariffs it intends to impose on April 2 unless Trump backs down or the sides negotiate a way out.
Macklem said the retaliatory measures and the recent depreciation of the loonie against the US dollar are among the rising costs of the trade dispute.
“A weaker Canadian dollar and new retaliatory tariffs both make imports more expensive. Businesses are also telling us that uncertainty itself imposes new costs.”
Senior Deputy Governor Carolyn Rogers told reporters the retaliatory tariffs will increase the economic pain, but she understands the government’s goal is to normalize trade relations.
--With assistance from Kevin Varley and Anya Andrianova.
(Updates to reflect the news conference is over. An earlier update added market, economist reaction starting in paragraph six.)
