Bank of Canada cuts rates to counter tariffs, will be cautious about future moves

The Bank of Canada trimmed its key policy rate by 25 basis points on Wednesday to 2.75 percent and warned of "a new crisis" as it tried to prepare the country's economy for the damage that President Donald Trump's tariffs could wreak.

The bank also said it would "proceed carefully with any further changes" to rates given the need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.

The cut marked the seventh consecutive time the central bank has eased monetary policy, shrinking the key rate by a total of 225 basis points in a space of nine months and making it one of the most aggressive central banks globally.

"We ended 2024 on a solid economic footing. But we're now facing a new crisis," Governor Tiff Macklem said in opening remarks to a press conference.

"Depending on the extent and duration of new US tariffs, the economic impact could be severe. The uncertainty alone is already causing harm," he said.

Trump's stop-start tariff policies and threats to a wide range of Canadian products have alarmed companies, shaken consumer confidence and hurt business investment.

The bank said that a protracted tariff war would lead to poor GDP growth and high prices, a challenging mix that makes it tough to decide on whether to hike or cut rates.

The rate-setting Governing Council will focus on assessing the timing and strength of both the downward pressure on inflation from a weaker economy and the upward pressure from higher costs, Macklem said.

The trade conflict would slow first-quarter GDP and could possibly disrupt the recovery in the jobs market, he said, adding that the fear of the impact of tariffs on prices had already pushed up short-term inflation expectations.

Inflation is expected to be around 2.5 percent in March, up from 1.9 percent in January, as a short-term sales-tax break ends.

The Canadian dollar extended gains after the decision and was trading stronger by 0.20 percent to 1.4403 to the US dollar, or 69.43 US cents. Yields on two-year government bonds dropped by 0.8 basis points to 2.521 percent.

Currency markets are betting that the chances of another rate cut of 25 basis points at the bank's next announcement on April 16 are 50/50.

REUTERS