The Bank of Canada reduced its key interest rate to 2.75 per cent on Wednesday amid tariffs and ongoing trade tensions.
Rising uncertainty clouds Canada’s economic outlook as U.S. tariffs threaten to raise prices while thwarting growth.
If further trade measures are introduced next month, expect the Bank of Canada to cut the policy rate by another 25 basis points to support growth and ease tariff pains.
Looking ahead to the rest of 2025, even more cuts might be needed.
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Business investments are already pulling back solely based on this uncertainty, let alone the actual effects of tariffs. As U.S. tariffs and Canada’s retaliatory measures take effect, consumers will be reluctant to spend as they beef up savings in the event of potential job losses.
Job security is a primary concern for Canadian households, especially among workers in industries that rely on exports to the U.S., such as manufacturing, auto production, energy and mining, and agriculture.
The silver lining is that most businesses are continuing with planned investments and projects, though they might hesitate to start new projects.
At this point, tariffs will usher in a one-time increase in prices rather than spur sustained inflation.
No silver bullet, but still helpful
Of course, the interest rate alone is not meant to solve the tremendous economic pains that come with broad-based tariffs. But it can smooth out the challenges that come with reduced economic activity, investments and household spending while Canada’s economy recalibrates to a new reality and develop alternative trade routes.
Tariffs aside, Canada’s economy posted solid growth through the end of last year—but this year looks a lot more uncertain.
While January had increased activity as businesses pulled forward orders in anticipation of tariffs, this momentum might not last as tariffs on some Canadian exports to the U.S. have already begun. More tariffs might come, further suppressing growth this quarter and beyond.
Although the loonie remains steady in relation to the U.S. dollar, it has dropped in value compared to other major currencies.
While currency value is not likely the most pressing concern right now, a lower loonie means consumers pay more for imported goods and businesses pay more for machinery and equipment.
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