
Tiff Macklem, Governor of the Bank of Canada, speaks during a news conference. (Photo by Dave Chan / AFP) (Photo by DAVE CHAN/AFP via Getty Images)
In the Jan. 29 update, Bank of Canada Governor Tiff Macklem said U.S. tariffs “could be very disruptive to the Canadian economy, and is clouding the economic outlook.”
The Bank’s key interest rate now sits at 3 percent. The Bank also announced it would be ending qualitative tightening and restart asset purchases in March so that its “balance sheet stabilizes this year and then begins to grow modestly in line with economic growth.”
Macklem noted the Bank of Canada does not know what tariffs will be implemented, how long they will last, or how Ottawa might respond in terms of retaliatory tariffs and economic support for Canadians. He also said it is difficult for the Bank to be “precise” because it has “little experience with tariffs of the magnitude being proposed.”
According to Macklem, a long-lasting trade conflict would “badly hurt” economic activity in Canada, while the higher cost of imported goods would increase inflation. “The magnitude and timing of the impacts on output and inflation will depend importantly on how businesses and households in the United States and Canada adjust to higher import prices,” he said.
Monetary policy alone would not offset the negative impacts of tariffs, which would include higher inflation and weaker economic output, according to Macklem. “We need to carefully assess the downward pressure on inflation from weakness in the economy, and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions,” he said.
Macklem said inflation in Canada has remained close to 2 percent, business and consumer expectations have normalized, and shelter price inflation has also been gradually coming down. The Bank projected that while there would be “some volatility in CPI inflation due to temporary tax measures,” a reference to the Liberal government’s two-month suspension of the GST and HST on some consumer items, inflation will remain close to the Bank’s 2 percent target over the next two years.
Macklem also said lower interest rates are beginning to boost economic activity, with household spending on housing and larger items like vehicles increasing. He noted that the labour market remains “soft,” with job creation lagging behind labour force growth and the unemployment rate hitting 6.7 percent in December.
The Bank of Canada forecasts that GDP growth will rise from 1.3 percent in 2024 to 1.8 percent in 2025 and 2026 due to lower interest rates and rising incomes. He said with Ottawa lowering its immigration rates, which had been boosting consumption, the projected increase in GDP is lower than it was in October.