The Bank of Canada has lowered its policy rate by 25 basis points to 2.75% as trade tensions between Canada and the U.S. intensify.
Overnight, the U.S. imposed a 25% tariff on all Canadian steel and aluminum imports—industries that generated nearly $40 billion in exports last year. Further trade restrictions are anticipated on April 2, when President Donald Trump is expected to introduce global reciprocal tariffs, potentially affecting key sectors such as automotive and agriculture.
Announcing the rate cut, Bank of Canada Governor Tiff Macklem cautioned that Canada is “facing a new crisis” and emphasized that monetary policy alone “cannot offset the impacts of a trade war.” He warned that the economic fallout could be severe, depending on the extent and duration of the tariffs, adding that “pervasive uncertainty” is already undermining business and consumer confidence.
Despite inflation remaining near the central bank’s 2% target and the economy growing by 2.6% in Q4 2024, Macklem acknowledged that ongoing trade disruptions could derail those gains.
Since Trump’s inauguration, his fluctuating tariff policies have unsettled markets. The most significant drop came just two days ago when the president admitted that his administration’s trade measures could push the U.S. economy into recession.
On Tuesday, Trump escalated tensions further by threatening to double tariffs on Canadian metals. However, Ontario Premier Doug Ford reversed his decision to impose a 25% surcharge on electricity exports to New York, Michigan, and Minnesota, easing some immediate concerns.
“Looking ahead, the ongoing trade conflict with the U.S. is expected to weigh on economic activity while driving up prices and inflation,” said Bank of Canada Governor Tiff Macklem.
A prolonged trade war could reduce the supply of goods, raise costs for Canadian consumers, and dampen overall spending. Macklem emphasized that the central bank must “proceed carefully” to balance inflationary pressures from higher costs with the economic drag caused by weaker demand.
Surveys Reveal Declining Consumer and Business Confidence
Between Jan. 29 and Feb. 28, the Bank of Canada surveyed hundreds of businesses and households to assess how economic conditions were shaping spending decisions.
In its survey of 2,500 households, the bank found growing concerns over job security and financial well-being, leading many to cut back on spending. Anxiety was highest among workers in trade-dependent industries, with those in mining, oil and gas, and manufacturing feeling the most vulnerable to job losses.
The bank’s business survey, which included 100 companies, revealed a broad decline in sales outlooks, particularly in the manufacturing sector. Heightened trade uncertainty has prompted many firms to scale back hiring and investment plans.
Additionally, businesses reported increased difficulty accessing credit, while the cost of imported capital goods—such as machinery and equipment—continued to rise, partly due to the depreciation of the Canadian dollar since October 2024.
With U.S. tariffs on China already in place and plans to extend them to Mexico and the European Union, Canadian businesses have limited options for controlling costs. Efforts to diversify supply chains often lead to higher expenses, as alternative suppliers tend to be more costly.
As a result, nearly half of the businesses surveyed indicated they would raise prices if tariffs were imposed on their supplies or products.
Notably, the survey was conducted before March 4—prior to the White House postponing its decision to impose 25% tariffs related to Canada’s border security and fentanyl control efforts. While those fentanyl-related tariffs will be reconsidered in April, tariffs on steel and aluminum have already taken effect.
