The central bank has cut rates – and more reductions could be ahead
The Bank of Canada has cut its benchmark interest rate by another 25 basis points, making a seventh straight reduction as the Canadian economy gears up for the potential seismic shock of a trade war with the United States.
The central bank said on Wednesday morning it had trimmed that overnight rate, which leads variable mortgage rates in Canada, to 2.75% amid growing uncertainty about the economic outlook in the face of US president Donald Trump’s aggressive trade measures.
While Bank decisionmakers were expected to hit pause on rate cuts in the wake of January’s 0.25% reduction, the decision by Trump to push ahead with punishing tariffs against Canada and Mexico last week appears to have convinced officials that rates need to move lower to mitigate that new threat.
The central bank described “pervasive uncertainty” from tariff threats as a big impediment to consumers’ spending intentions and businesses’ hiring plans, acting as a potential weight against inflation and spurring the decision to cut.
Trump pared back the majority of those charges last Thursday, announcing a delay until April 2 to all levies against Canada imports covered under the USMCA (US-Mexico-Canada free trade agreement).
But 25% surcharges on all steel and aluminum imports from Canada are set to take effect today, while Ontario premier Doug Ford appeared to stave off a dramatic Trump trade escalation yesterday by agreeing to bench tariffs on electricity moving from the province to the US.
Trump had earlier raged against that measure, threatening massive retaliation and vowing to double the steel and aluminum levies before Ford dropped the tariff after speaking with US commerce secretary Howard Lutnick.
Still, the trade spat has roiled financial markets and sparked a huge stock selloff amid growing fears that Trump’s combative approach to trading partners could spike prices in the US and cause a recession there.
The Canadian economy could also be hugely vulnerable to a lengthy trade war and the central bank may be compelled to ultimately bring rates lower than 2% if the current uncertainty continues, according to Canadian Imperial Bank of Commerce (CIBC) deputy chief economist Benjamin Tal.
He told the Financial Post Canada’s economy was “toying with a recession” if the “madness” of the trade war rolls on.
The Bank is scheduled to meet for its next interest rate decision on April 16 – exactly two weeks after Trump’s next round of tariffs on Canada are set to kick in.
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