BoC cuts key interest rate to 3% as tariff threats loom

Winnipeg Jets GM Kevin Cheveldayoff and head coach Scott Arniel speak to media after the Jets’ season ended last week.

Canada’s central bank has cut interest rates for a sixth consecutive time as inflation remains around two per cent and the threat of U.S. tariffs looms.

The 25-basis point cut comes as the Bank of Canada forecasts GDP growth will strengthen in 2025 if there is no trade war with the United States.

In his speech to reporters, Bank of Canada Governor Tiff Macklem said while tariffs are top of mind, they were not factors in the rate cut and the monetary policy report (MPR) released today.

“Since scope and duration of a possible trade conflict are impossible to predict, the MPR projection we published today provides a baseline forecast in the absence of tariffs,” said Macklem.

While the threat of tariffs remains a major source of uncertainty, Bank of Canada officials say there are a number of possible scenarios which makes it difficult to assess the economic impacts.

Macklem says a protracted and broad-based trade war would hurt economic activity in Canada with the higher cost of imported goods putting direct upward pressure on inflation.

“Unfortunately, tariffs mean economies simply work less efficiently – we produce and earn less than without tariffs,” Macklem told reporters. “Monetary policy cannot offset this. What we can do is help the economy adjust.”

With inflation back around the two per cent target, Macklem says the central bank is in a better position to be a source of economic stability.

What could tariffs do?

The central bank has started looking at the different scenarios and the consequences of a trade war with the United States.

One model presented in the bank’s monetary policy review shows a scenario where 25 per cent tariffs applied by both Canada and the U.S. would result in a 2.5 per cent drop of GDP in this country in the first year and a 1.5 per cent drop in GDP in the second year.

“What you see in most of those simulations is growth in year one after tariffs, two and a half to three per cent lower than it otherwise would have been in the first year,” said Macklem. “If you thought growth was going to be two per cent, if you take two-and-a-half per cent off two, you’ve got a negative number. So yes, people would call that a recession.”

If Canada and the U.S. both impose 25 per cent tariffs on each other, the bank’s MPR predicts lower GDP growth and higher inflation in both countries. The bank believes a trade conflict would have a negative impact on both exports and imports in Canada.

The bank predicts 25 per cent tariffs would worsen Canada’s trade balance and could lead to a depreciation of the Canadian dollar.

With less demand for Canadian goods, exporters could lower production and lay off workers. That resulting decline in business investment could significantly reduce GDP in Canada.

With less demand for Canadian goods, exporters could lower production and lay off workers. That resulting decline in business investment could significantly reduce GDP in Canada.

Macklem has not ruled out interest rate cuts in the future, depending on what the Trump administration does and how the Trudeau government responds.

Sources tell CTV News the federal government is planning a stimulus package to help Canadians and businesses if the two countries get into a tit-for-tat tariff and trade war. Sources also say the aid could reach pandemic-level relief, but specific programs have yet to be designed.

Some economists warn there are consequences to creating packages or programs that could be too generous.

“When we think about the pandemic response, for instance, obviously led to a very significant increase in the deficit, and which we’re still dealing with some extent,” said Jean-Francois Perrault, Scotiabank’s chief economist, in an interview with CTV News. ”It also contributed, in a very powerful way to the inflation that we’ve seen, and the fact that bank Canada raised interest rates as much as they did.”

After the pandemic the central bank raised interest rates to five per cent for 11 months, in and effort to curb inflation which had hit 8.1 per cent in June of 2022.