The Bank Of Canada Cuts Key Interest Rate to 2.75%

On economic growth: “Past interest rate cuts have boosted consumer spending and business investment, increasing domestic demand in the fourth quarter by a robust 5.6%. 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.”

On employment: “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.” 

On 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 2.5% in March with the end of the tax break.”

On the threat of U.S. tariffs on inflation: “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 us that uncertainty itself imposes new costs.” 

As the BoC’s interest rate decisions influence the prime rate, the ‘Big Six Banks’ and other lenders have again lowered their prime rate to 4.95%, which is good news for holders of variable-rate mortgages and other loans. 

The timeline of major announcements (to date):

November 25, 2024: Then President-elect Donald Trump announced his intention to impose a 25% tariff on products entering the U.S. from Canada and Mexico, and 10% from China. This action was in response to the alleged flow of undocumented migrants and illegal drugs, such as fentanyl, across the border. 

February 1, 2025: President Trump made the threat official, signing an executive order to start levying import tariffs on Canada and Mexico as of Tuesday February 4. Prime Minister Trudeau, in turn, announced retaliatory tariffs of 25% on American imports, including beverages, cosmetics and paper products worth $30 billion, with a second round of goods (including passenger vehicles, trucks, steel and aluminum products and certain foods) worth $125 billion to be included later. Following 11th-hour negotiations, Trump announced a 30-day moratorium on tariffs for both countries; however, Trump’s threat to impose 10% tariffs on Chinese goods took effect as of February 4. Canada’s first round of tariffs remained in place.

February 13: Trump then announced a 25% tariff on all foreign steel and aluminum imports, starting March 12. This is in addition to the 25% tariffs previously announced and on pause. That same day, Trump also signed a memorandum to impose reciprocal tariffs on all foreign imports as of April 12.

March 4: Trump’s tariffs on Canada and Mexico went into effect and Canada’s retaliatory tariffs also took hold.

March 5: Trump announced he would exempt Ford, Stellantis and General Motors (The Big Three automakers) from tariffs on Canada and Mexico until April 2.

March 10: Ontario imposed a retaliatory 25% export tax on electricity sold to households in Michigan, Minnesota and New York in response to U.S. tariffs.

In response, on March 11, Trump said he would increase steel and aluminum tariffs to 50% on Canadian exports. Ontario Premier Doug Ford threatened to shut down power exports entirely. Ford later announced he would suspend the export tax pending the results of a meeting at the White House, scheduled for March 13. Trump maintains he will keep the steel and aluminum tariff rate at 25% for all trading partners, including Canada, effective March 12 at midnight.

A tariff is a government-imposed tax on imported goods paid by the importer. The intent is to make foreign products more expensive and therefore reduce demand. 

According to Al Jazeera, the United States’ top trading partners–Mexico, Canada and China–account for more than 40% of goods traded, valued at more than $2 trillion. 

The central bank noted that while economic growth is stronger than expected, “the pervasive uncertainty created by continuously changing U.S. tariff threats” has a cooling effect on consumer spending, as well as business investment. 

“Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe. The uncertainty alone is already causing harm,” noted Macklem. 

He also emphasized that 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. Governing Council will be carefully assessing the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs,” adding that, “The Bank is committed to maintaining price stability for Canadians.”

Douglas Porter, Chief Economist and Managing Director Economics, BMO Economics: “Looking ahead, future decisions will be largely guided by the direction of travel in the trade war, although we suspect the Bank was headed a bit lower in any event. We continue to expect three more 25 basis point cuts at the next three meetings, taking the overnight rate down to 2%. Clearly, that’s dependent on how tariffs evolve, while the eventual fiscal response could have an impact as well. Our core assumption is that Canada will be facing some serious tariffs for an extended period of time and that the growth-dampening aspects of the trade war will ultimately outweigh the upside inflationary impact, keeping the Bank in easing mode.”

James Orlando, Director and Senior Economist, TD Economics: “As long as the pressure on tariffs remains in place, the BoC should keep its dovish bias. We have the overnight rate getting to 2.25% by June, but see limitations in going further due to the delicate balance in managing inflation expectations.”

Randall Bartlett, Senior Director of Canadian Economics, Desjardins: “While today’s rate cut was in line with market expectations, the tone of the press release gave little indication of what to expect in April… the trade war with the U.S. is likely to have a stagflationary impact on the Canadian economy, characterized by a combination of higher inflation and lower real GDP growth at least temporarily. The Bank will need to balance these impacts along with any increase in Canadians’ inflation expectations….Our forecast has embedded a more gradual rate cut profile than would be expected absent the upward pressures on inflation, but clearly the BoC will want to assess the early evidence, both on growth and inflation, before offering more accommodation.”

Taylor Schleich, Ethan Currie and Warren Lovely, economists, National Bank of Canada: “Prior to [today’s] decision, our baseline expectation for the BoC rate path was for successive 25 basis point cuts, bringing the overnight target to 2% by the summer. However, the Bank’s evolving view/focus on inflation suggests the bar to rapid rate relief is somewhat higher than we’d thought. That means data dependence will be more important as the Bank won’t simply cut in anticipation of economic weakness. Nonetheless, we expect economic damage to rack up over coming months and against that backdrop, it could be difficult for the BoC to stand on the sidelines. That’s especially true if you believe their earlier analysis that shows the near-term negative growth impacts of a trade war are disproportionately larger than near-term inflation pressures. We’d therefore brace for another cut in April, although incoming data will be key. If inflation surprises higher and GDP/job growth holds up okay, we’d likely see the Bank leave rates steady for the first time in a year.”

Avery Shenfeld, Chief Economist, CIBC World Markets: “We’re sticking with our existing forecast for a further 25 basis point cut at each of the next two rate decisions. The resulting 2.25% overnight rate could end up being the trough for this cycle if, by summer, Canada and the U.S. are able to hammer out a deal that largely removes tariffs on both sides. That’s still our base case forecast at this point. But a longer and more protracted trade war would entail a major recession, with the extent of further rate cuts being dependant on how strongly fiscal policy steps in to support growth and on evidence showing that the initial upswing in prices is starting to be offset by downward pressure on inflation from greater economic slack.” 

Claire Fan, Senior economist, RBC Economics: “Our own base-case has assumed further BoC interest rates cuts to a 2.25% around mid-year—we continue to expect (and consistent with BoC communications today) that there won’t be a race to the bottom for interest rates beyond those previously expected cuts this year.”