Finance
Bank of Canada Cuts Benchmark Interest Rate to 3 Percent
The Bank of Canada reduced its key interest rate by 0.25%, bringing it to 3%, and announced it would no longer provide forward guidance on potential rate changes. The decision reflects uncertainty caused by potential tariffs from the Trump administration, creating economic unpredictability.
Governor Tiff Macklem and his team made this adjustment on Wednesday, marking the sixth rate cut in a row. While markets and economists widely expected the move, bond markets reacted strongly to the central bank’s cautious tone. Given external risks, policymakers admitted they are uncertain about the economy’s direction.
“There’s a lot of uncertainty right now. Offering guidance didn’t feel particularly useful,” Macklem stated during a press conference. “We’re unclear on what actions the U.S. might take, and even when we know more, we’ll need time to assess how it affects Canada’s economy.”
The central bank indicated that Canada’s economy would likely grow without tariffs, with inflation hovering near its 2% target. However, it warned that the imposition of broad tariffs could significantly challenge the country’s economic resilience.
Bank of Canada Inflation Concerns
Following the announcement on Bloomberg, Canadian two-year bond yields fell to 2.794%, the lowest since June 2022. Meanwhile, the Canadian dollar, or loonie, weakened to C$1.4422 per U.S. dollar.
Since June, the Bank of Canada has lowered its benchmark rate by two percentage points, describing this as a “substantial” easing effort. Inflation is expected to stay near the 2% target through 2026, with risks to inflation seen as balanced.
Policymakers noted that existing rate cuts stimulate the economy, boost consumer spending and housing, and gradually reduce excess supply.
Despite this progress, the looming threat of a tariff conflict remains a major concern. President Trump has signalled plans to impose 25% tariffs on Canadian and Mexican goods, potentially as early as Saturday. Canada has vowed to respond with retaliatory measures if these tariffs materialize.
This uncertainty suggests the central bank will likely avoid further rate changes until there is more clarity on U.S. trade policies. If the tariff threat subsides, Canada’s economy may achieve a soft landing.
“The overnight rate now stands at 3%,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, in a note to investors. “Even without trade risks, caution is warranted, as it’s unclear where the neutral rate is or how much stimulus is needed.”
Canadian Dollar to Weaken
In a monetary policy report, the Bank of Canada outlined forecasts assuming no tariffs but also modelled a scenario where a long-term trade dispute involving 25% tariffs between the U.S. and Canada disrupts the economy. The report stated that such a situation would weaken economic growth while increasing consumer prices.
The report explained that higher import costs and a weaker loonie could fuel inflation, outweighing the drag from reduced exports, business investment, and lower demand. This scenario would force the central bank into a tough position.
“With only one tool—our policy rate—we can’t counter both weaker growth and rising inflation at the same time,” Macklem said, adding that the bank would need to carefully balance these opposing pressures.
The Bank of Canada has also revised its economic growth forecasts for 2025 and 2026 due to reduced immigration targets the federal government sets. It now expects growth of 1.8% in both years, down from earlier projections of 2.1% and 2.3%. While estimates for exports and business investment were trimmed, consumption forecasts were slightly raised.
The Bank of Canada attributed roughly 1% of the Canadian dollar’s depreciation since October to differences in interest rates between Canada and the U.S.
“The recent drop in the loonie is largely tied to trade uncertainties, especially President Trump’s tariff threats,” Macklem explained. The loonie has declined about 4% against the U.S. dollar since the last U.S. election.
Additionally, officials announced plans to halt quantitative tightening in March. Asset purchases will resume as part of normal balance sheet management. Starting Thursday, they adjusted the deposit rate, 5 basis points below the overnight rate, to improve liquidity in financial markets.
These updates reflect the central bank’s ongoing efforts to manage a challenging economic environment. Trade tensions and domestic factors continue to shape its policy decisions.
