The Bank of Canada announced today that it is lowering its key interest rate by 25 basis points, bringing the overnight rate to 2.75% in response to growing economic uncertainty, particularly due to trade tensions with the United States.
Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers discussed the decision during a press conference, explained the current economic situation and the reasoning behind the rate cut.
The Bank of Canada stated that while the Canadian economy was in a strong position at the end of 2024, with inflation close to its 2% target and solid growth, there are risks ahead. The risks come from ongoing trade conflict with the United States, which could slow economic growth and increase inflation in Canada.
Canada’s economy grew by 2.6% in the fourth quarter of 2024, following an upwardly revised 2.2% growth in the third quarter. This was stronger than expected, surpassing the Bank’s earlier projections. Employment growth was also solid through November and January, leading to a decline in the unemployment rate to 6.6%. However, job growth stalled in February, and there are signs that trade tensions could affect the job market moving forward.
Inflation has remained close to the 2% target, but the Bank projects it will rise slightly to about 2.5% in March due to the end of temporary tax breaks. The core inflation measures remain above 2%, mainly due to the persistence of higher shelter prices.
The ongoing trade tensions with the U.S. are a significant factor in the current economic situation. U.S. tariffs on Canadian goods have raised concerns that Canadian exports could decrease, which could slow economic growth. At the same time, the weaker Canadian dollar, which has remained broadly unchanged against the U.S. dollar but weaker against other currencies, is making imported goods more expensive, contributing to inflationary pressures.
Macklem emphasized that while the Bank of Canada cannot solve the broader issues of a trade war, it can help manage inflation and ensure that price increases do not lead to long-term inflation. The Bank is committed to keeping inflation close to its 2% target, despite the ongoing trade conflict.
Given the current economic challenges, the Bank of Canada decided to reduce its key interest rate by 25 basis points to 2.75%. This rate cut follows a series of interest rate reductions in 2024 aimed at stimulating economic activity. Past interest rate cuts have supported household spending, especially in the housing market. However, Macklem said that the Bank cannot prevent the effects of a trade dispute; it can only work to ensure that price increases do not lead to ongoing inflation.
While economic growth in the fourth quarter of 2024 was stronger than expected, the Bank of Canada is mindful that the first quarter of 2025 may show a slowdown due to the uncertainty surrounding the U.S.-Canada trade relationship.
The Bank’s recent surveys show that consumer confidence has dropped significantly, with Canadians becoming more worried about their job security. Businesses, particularly those in sectors that rely on consumer spending, are also lowering their expectations for sales. In fact, 40% of businesses surveyed plan to scale back on hiring due to the uncertainty. As a result, companies in export-oriented industries are adjusting their investment and hiring plans.
Looking ahead, the Bank of Canada is cautious about the future. Macklem emphasized that the Bank will continue to assess the situation carefully, since trade policies are changing frequently. The Bank’s primary goal is to keep inflation stable, even if there are short-term price increases.
Macklem also highlighted the importance of keeping inflation expectations well-anchored. He noted that if inflation expectations were to rise significantly, it could signal a more persistent inflation problem, which the Bank would work to prevent.