Bank of Canada Cuts Interest Rates Again Amid Trade War

The Bank of Canada slashed its benchmark interest rates by 25 basis points on Wednesday, marking the seventh consecutive cut as the trade conflict with the United States escalates. Calling the situation “a new crisis,” the central bank warned of potentially severe economic consequences.

Despite signs of economic strength at the start of 2025, the looming trade war and “pervasive uncertainty created by continuously changing U.S. tariff threats” forced the Bank to act. The latest reduction brings the policy rate to 2.75 percent, the lowest level since September 2022.

“We ended 2024 on a solid economic footing. But we’re now facing a new crisis,” Bank of Canada Governor Tiff Macklem said in his opening statement on Wednesday. He cautioned that new U.S. tariffs could severely impact the economy, and even the uncertainty alone is already causing harm.

The central bank released preliminary results from a survey conducted between Jan. 29 and Feb. 28, revealing a sharp decline in business and consumer confidence. Respondents expect the trade tensions to drive up prices, reduce sales, limit investment, and curb spending. Senior Deputy Governor Carolyn Rogers acknowledged that “sentiment has turned quite sharply” among Canadians.

Bank of Canada Cuts Interest Rates Again Amid Trade War

While trade uncertainty weighs on consumers and businesses, Macklem emphasized the need for a careful approach to future interest rate decisions. The Bank must balance inflationary pressures from rising costs with the dampening effects of weaker demand.

“Monetary policy cannot offset the impacts of a trade war,” the Bank of Canada stated, adding that it will closely monitor inflation expectations while assessing the downward pressures from a slowing economy and the upward pressures from increased costs.

Financial experts are divided on whether the Bank will continue to cut rates. Desjardins managing director and head of macro strategy Royce Mendes noted that the decision in April will hinge on inflation expectations.

“The focus on rising inflation expectations in today’s release is somewhat hawkish,” Mendes wrote, adding that if the trade war’s effects emerge gradually and financial stability remains intact, another cut in April will depend on inflation expectations staying anchored.

Market indicators suggest a 45 percent chance of another 25-basis-point rate cut on April 16, according to Reuters.

BMO chief economist Douglas Porter believes future rate decisions will hinge on trade developments. He anticipates three additional 25-basis-point cuts at the next three meetings, bringing the rate to two percent—though this remains contingent on how tariffs evolve.

CIBC economist Avery Shenfeld described the latest cut as “a Band-Aid” for an economic wound of uncertain severity.

While the Bank of Canada remains cautious in signaling future moves, its decision to cut rates on Wednesday underscores concerns over economic growth amid an unpredictable trade war. The next few months will be critical in determining the trajectory of monetary policy as Canada navigates the turbulent global landscape.

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