The Bank of Canada cut its key interest rate for the seventh time in a row on Wednesday, bringing it to 2.75 per cent.
Though the series of rate cuts has eased some pressure on consumers after the central bank hiked rates to fight inflation, the burgeoning trade war with the U.S. has cast a shadow over the economy and consumers.
Here's what we learned about the economy, inflation and more from the central bank's decision and press conference Wednesday.
Economic uncertainty amid trade war
Bank of Canada governor Tiff Macklem said that although the economy ended 2024 in good shape, the continuously changing tariff announcements by U.S. President Donald Trump are shaking business and consumer confidence.
The uncertainty has households pulling back spending and businesses rethinking plans to hire and invest, he said during a press conference after the rate decision was announced.
Senior deputy governor Carolyn Rogers said the central bank expects to see lower demand amid a trade war.
"Canadians are planning to spend less, they're worried about job security," she told reporters.
And while inflation has been hovering around the central bank's two per cent target, the trade war could change that. Macklem said the economic damage from tariffs could be severe, depending on how long they are in place and how steep they are.
"The trade conflict with the United States can be expected to weigh on economic activity, while also increasing prices and inflation," Macklem said.
Concern about the job market
Macklem said the Canadian job market strengthened around the end of the year but stalled in February.
Concerns about job security are mounting, in particular among workers in industries that rely heavily on exports to the U.S., he said, such as manufacturing, mining and oil and gas.
"I think that's probably what's leading to the decisions around spending and saving," said Rogers.
Pressure on the loonie
The Bank of Canada's interest rate policy has diverged steadily from that of the U.S. Federal Reserve, as the U.S. economy has been more resilient in the face of high interest rates.
A wider spread between the two banks' rates tends to weigh on the Canadian dollar, which Macklem noted is already under significant pressure right now from tariffs. A weaker loonie can become inflationary as it makes imports into Canada more expensive.
The Fed's most recent forecast for rates saw it cutting twice in 2025, but expectations from the market had been trending closer to just one cut for the year.
However, recently some U.S. economic data has surprised to the downside, and in recent weeks amid the uncertainty of Trump's tariff bent, rate cut expectations have risen for the year.
The rate path
The Bank of Canada's key interest rate now sits at 2.75 per cent, almost half of the five per cent high it reached as the central bank hiked rates to fight inflation.
On Wednesday, Macklem said the central bank will proceed carefully with further rate decisions as it assesses the upward pressures on inflation and downward pressures from weaker demand amid the trade conflict.
However, he also warned that the Bank of Canada is limited in its tools to offset the damage.
"Monetary policy cannot offset the impacts of a trade war," said Macklem.
"We're going to get weaker economic activity. We're going to get higher prices, higher inflation. We can't change that. What we can do is ensure that any rise in inflation is temporary."
BMO chief economist Douglas Porter said the bank expects three more cuts in the next three meetings, bringing the policy rate to two per cent.
"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," he wrote in a note.
Asked Wednesday whether the Bank of Canada governing council had discussed lowering the rate by more than a quarter-point, Macklem replied, "We did not seriously consider a cut of 50 basis points."
"We did not want to get ahead of ourselves, and we're going to be assessing these things carefully," he said.
Against a backdrop of uncertainty, Macklem said the bank can't provide forward guidance when it comes to its interest rates.
"We're going to do as much as we can to help the economy adjust to the painful adjustment to higher U.S. tariffs," he said.
"But what we can do is limited by the need to control inflation."
This report by The Canadian Press was first published March 12, 2025.
Rosa Saba, The Canadian Press
