Bank of Canada Lowers Key Interest Rate to 3 Percent Amid US Tariff Threat

by EditorL

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)

OTTAWA—The Bank of Canada announced a 25 basis point reduction of its key interest rate, its sixth consecutive interest rate decrease, warning that the imposition of U.S. tariffs remains a “major uncertainty.”

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.”

U.S. President Donald Trump has threatened to impose 25 percent tariffs on both Canada and Mexico if the two countries do not take sufficient action on border security. The U.S. administration recently said tariffs will be imposed on Feb. 1.

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.

Ottawa announced in October that immigration targets will fall from 500,000 new permanent residents in both 2025 and 2026, to be lowered to 395,000 in 2025 and 380,000 in 2026. It will drop further to 365,000 in 2027.
In March 2022, the Bank of Canada began raising interest rates in response to high inflation caused by the COVID-19 pandemic, disrupted global supply chains, increased government spending, and higher energy prices. Interest rates increased from 0.25 percent in March 2022 to 5 percent in July 2023, while inflation rose from 2.2 percent in March 2021 to 8.1 percent in June 2022.
The Bank first reduced its key rate to 4.75 percent in June 2024 in response to lowered inflation, then reduced it by an additional 25 basis points in both July and September and 50 basis points in both October and December.

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