Bank of Canada Lowers Interest Rates; Warns on Possible Tariffs

The Bank of Canada trimmed its key overnight lending rate for the sixth straight time on Wednesday. 

The 25-basis point reduction – which brings the Bank’s policy rate down to 3%, the lowest since September 2022 – marks a slowdown from the previous two rate cuts of 50 basis points each and was largely expected by analysts and economists. 

In its accompanying statement, the Bank said upside and downside economic risks are reasonably well balanced for now, but warned US President Donald Trump’s threat to impose tariffs on American imports of Canadian goods could cause significant economic harm. The potential for retaliatory tariffs on imports of American goods would also raise costs for Canadian consumers, it said. 

“A protracted trade conflict would most likely lead to weaker GDP and higher prices in Canada,” the Bank’s statement said. 

Assuming the absence of a Canada-US trade battle, the Bank forecasts GDP growth will strengthen in 2025. However, with slower population growth because of reduced immigration targets, both GDP and potential growth will be more moderate than was expected in October. Following growth of 1.3% in 2024, the Bank now projects GDP will grow by 1.8% in both 2025 and 2026. 

Meanwhile, inflation is projected to hover near the preferred level of 2% for the next couple of years. 

Those forecasts will go out the window, however, if Trump follows through with his threat to levy tariffs as soon as Feb. 1. 

“If broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested,” the Bank said. “We will be following developments closely and assessing the implications for economic activity, inflation and monetary policy in Canada.”