The Bank of Canada cuts interest rates by 25 basis points as scheduled, pausing future guidance due to threats from Trump's tariffs
The Bank of Canada announced a 25 basis point reduction in the benchmark overnight rate to 3%, in line with market expectations, and removed guidance for future rate cuts. The central bank expects the economy to gradually strengthen, but Trump's tariff threats pose significant uncertainty to the economic outlook. The rate cut has begun to stimulate consumption and the housing market, and inflation is expected to remain near the 2% target until 2026. If the U.S. and Canada impose a 25% tariff on each other, the Canadian economy will be severely impacted, with rising import costs, increasing prices, and declines in exports and investment
According to the Zhitong Finance APP, the Bank of Canada announced on Wednesday that it has lowered the benchmark overnight rate by 25 basis points to 3%, in line with market expectations. The bank also removed guidance on any further adjustments to borrowing costs in the future.
In its statement, the Bank of Canada said, "The economy is expected to gradually strengthen, and inflation will remain near the target level. However, if widespread and significant tariffs are implemented, the resilience of the Canadian economy will be tested."
Since June of last year, the Bank of Canada has cumulatively cut interest rates by 200 basis points. This latest rate cut is smaller than the previous two consecutive cuts of 50 basis points each (in October and December 2023), and it no longer provides guidance for further rate cuts in the future.
The central bank expects inflation to remain near the 2% target until 2026, with both upward and downward risks to price pressures being roughly balanced. At the same time, policymakers noted that rate cuts have begun to stimulate the economy through consumption and the housing market, and the current excess capacity will gradually be absorbed in the coming years.
However, the central bank also emphasized that the trade war threats from U.S. President Trump pose significant uncertainty to the economic outlook. Trump has repeatedly stated that he will impose a 25% tariff on several countries, including Canada, as early as this Saturday, and the Canadian government has vowed to retaliate.
Overall, the communication from the Bank of Canada indicates that it is unlikely to further adjust monetary policy in the short term, at least until Trump's trade policies become clearer. If we disregard the tariff threats, the Canadian economy seems to be moving towards a soft landing.
In the accompanying monetary policy report, the central bank made economic forecasts based on a baseline scenario without tariff impacts and simulated the potential shocks of a prolonged trade dispute. If a 25% tariff is imposed reciprocally between the U.S. and Canada, the Canadian economy would suffer severe blows, primarily manifested as: rising import costs leading to price increases; declines in exports, business investment, and demand; and the inflationary impact of a depreciated Canadian dollar outweighing the drag from falling exports.
Bank of Canada Governor Tiff Macklem stated in his speech that although monetary policy has played a role in restoring price stability, a comprehensive trade conflict would severely damage economic activity while pushing inflation higher.
"Due to the singular nature of policy tools, we cannot simultaneously address slowing economic growth and rising inflation," Macklem said, adding that the central bank needs to carefully assess the upward pressure on inflation from the trade war and the downward pressure from weakening demand, weighing both factors.
The Bank of Canada also lowered its economic growth forecast for 2025 due to the federal government's reduction in immigration targets. The latest forecast shows GDP growth rates of 1.8% for 2025 and 2026, down from previous expectations of 2.1% and 2.3%. At the same time, the central bank lowered its forecasts for business investment and exports but raised its consumption expectations.
Additionally, the central bank announced that it will officially end its quantitative tightening (QT) policy on March 5, at which point it will resume normal asset purchases to manage the size of its balance sheet.
The central bank also adjusted the deposit rate, which will be set at 5 basis points below the overnight rate starting Thursday. This move may aim to promote liquidity in settlement balances among financial market participants.
The Bank of Canada estimates that the depreciation of the Canadian dollar by about 1% since last October is related to the divergence in interest rate policies with the Federal Reserve. As the Federal Reserve has not yet cut rates while Canada has been cutting rates consecutively, this policy divergence has put pressure on the Canadian dollar