Overview:
Bank of Canada said 'there could be a need for a reduction in the ... rate if the economy weakens in the face of continued U.S. tariffs'
Canada’s central bank on Wednesday held its key lending rate at 2.75 per cent, saying it needed to be cautious in its monetary policy amid continued uncertainty caused by President Donald Trump’s trade war.
“With uncertainty about U.S. tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, [the bank’s] Governing Council decided to hold the policy rate as we gain more information on U.S. trade policy and its impacts,” the Bank of Canada said in a statement.
Trump announced — then halted, pending negotiations — several levies on Canadian imports into the United States, while Canada hit back with counter tariffs.
Trump has targeted Canada’s automotive, steel and aluminum sectors in particular with levies. The steel and aluminum tariffs were doubled on Wednesday to 50 per cent.
The on-and-off again trade policy has made the Bank of Canada’s job of trying to maintain price stability while supporting economic growth more challenging.
Wednesday’s rate pause was widely expected.
But Bank of Canada governor Tiff Macklem said at a news conference that members of the governing council felt “there could be a need for a reduction in the policy rate if the economy weakens in the face of continued U.S. tariffs and uncertainty, and cost pressures on inflation are contained.”
The bank noted downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.
Going forward, the central bank said it would be “proceeding carefully, with particular attention to the risks and uncertainties facing the Canadian economy.”
It had initially paused interest rates at its previous meeting in April, following seven consecutive rate cuts since last summer that had considerably lowered borrowing costs.
Inflation eased that month to 1.7 per cent, while economic growth in the first quarter came in at 2.2 per cent — stronger than the bank had forecast, but it was predicted to be weaker in the second quarter as a surge in exports to get ahead of the U.S. tariffs subsides.
The Bank of Canada noted that the Trump administration continues to “increase and decrease various tariffs.”
The United States has started trade negotiations with several countries including Canada, but “the outcome of these negotiations are highly uncertain” and “new trade actions are still being threatened,” it said.
TD Economics analyst Leslie Preston said in a research note: “We expect that barring a trade negotiation miracle with the Trump administration, Canada’s economy is likely to tip into recession this year, and more interest rate cuts will be required.”
Desjardins analyst Royce Mendes said he continues also to expect the Bank of Canada will cut rates — by another 75 basis points this year.
