The Bank of Canada cut interest rates by a quarter percentage point - as expected - and called the trade battle with the US a “new crisis,” but pushed back on expectations that policymakers were on a predetermined cutting path.
“We're now facing a new crisis. Depending on the extent and duration of new US tariffs, the economic impact could be severe,” Bank of Canada Governor Tiff Macklem said in prepared remarks of an opening statement.
Macklem called the uncertainty of the tariff dispute “pervasive” and said that it was “already causing harm.”
Officials said the “continuously changing” US tariff threat was hitting consumers' spending intentions and limiting businesses' plans to hire and invest.
At the same time, Macklem said the bank “will proceed carefully with any further changes” to borrowing costs, and officials would “need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.”
There's lots of red in the red-line from the prior statement:
Breaking down the details:
Economy
Past interest rate cuts have boosted consumer spending and business investment, increasing domestic demand in the fourth quarter by a robust
5.6%.
Economic data since our January MPR suggests the Canadian economy ended 2024 on a stronger footing than we expected
Overall, GDP grew 2.6% in the fourth quarter after upwardly revised growth of 2.2% in the third quarter. This growth path is considerably stronger than we were expecting based on the information we had in January.
Looking ahead, the trade conflict with the United States can be expected to weigh on economic activity, while also increasing prices and inflation.
Credit has become more difficult to access for some businesses, and with a weaker Canadian dollar, the cost of imported machinery and equipment has risen.
Job market
Job growth also strengthened around the end of the year before stalling in February.
Growth in employment increased in November through January, surpassing labour force growth, and the unemployment rate declined to 6.6%.
There were also signs that wage growth is moderating.
Inflation
Inflation has remained close to the 2% target.
The temporary GST/HST holiday has lowered some consumer prices, but January inflation came in a little firmer than expected at 1.9%.
Inflation is forecast to increase to about 2/% in March with the end of the tax break.
It will take some time for the impacts of higher costs and weaker demand to work their way through the economy and affect the prices Canadians will face.
Governing Council will be tracing the impact of cost pressures through to consumer prices.
They will also be closely monitoring inflation expectations. Keeping medium- and longer-term inflation expectations well anchored is imperative to ensure any rise in inflation is temporary.
Our surveys also suggest business intentions to raise prices have increased as they cope with higher costs related to both uncertainty and tariffs. At the same time, inflation expectations have moved up as Canadians brace for the possibility of higher prices.
Tariffs
The impacts of uncertainty and tariffs on inflation are more difficult to assess.
Uncertainty that weighs on household and business spending tends to put downward pressure on inflation. And new tariffs will hurt our exports and weaken business investment. But costs are rising too, and this will put upward pressure on inflation.
A weaker Canadian dollar and new retaliatory tariffs both make imports more expensive. Businesses are also telling them that uncertainty 'itself imposes new costs.
While it is too early to see much impact of new tariffs on economic activity, our surveys suggest that threats of new tariffs and uncertainty about the Canada-US trade relationship are already having a big impact on business and consumer intentions.
Monetary policy cannot offset the impacts of a trade war.
Perhaps most notably, Canadian policymakers also reiterated that there's a limit to how much they think they can intervene.
The tariff battle will come with an inflation shock, the bank said, and it will “be tracing the impact of cost pressures through to consumer prices.”
“Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation.”
Macklem concluded by noting that the retaliatory measures and the recent depreciation of the loonie against the US dollar are among the rising costs of the trade dispute.
“A weaker Canadian dollar and new retaliatory tariffs both make imports more expensive. Businesses are also telling us that uncertainty itself imposes new costs.”
The reaction was muted for now in the Loonie...
BoC's decision comes just minutes after US Commerce Secretary Howard Lutnick discussed the potential for discussions with Canada on tariffs...
.@howardlutnick: "What does @POTUS want? He wants to worry about major things for national security... these are the kind of tariffs that are going to make sure these things come back to America and are built in America — and then on April 2nd, he does his reciprocal tariffs." pic.twitter.com/IjlQFH1Lhf
— Rapid Response 47 (@RapidResponse47) March 12, 2025
And that followed a Bloomberg report that Canada will announce counter-tariffs on about C$30 billion ($20.8 billion) of US-made products on Wednesday, according to people familiar with the matter. Government officials are expected to announce the details in the next hour.
