Canada’s central bank cut its key lending rate to 2.25 per cent on Wednesday, saying that an economy weakened by President Donald Trump’s tariffs was undergoing a “structural adjustment” as U.S. ties evolve.
The cut by a quarter of a point marked the second consecutive rate reduction by the Bank of Canada, after a quarter-point cut in September.
Since Trump returned to office in January, Canada’s central bank has been closely watching the impacts of his protectionist trade policies.
“U.S. tariffs and trade uncertainty have weakened the Canadian economy,” Bank of Canada Governor Tiff Macklem stated, adding that the impacts of Trump’s policies were likely to endure.
“The weakness we’re seeing in the Canadian economy is more than a cyclical downturn, it’s also a structural adjustment,” he said.
Trump’s sector-specific tariffs have hit hard in Canadian industries like auto, steel, and aluminum.
The majority of U.S.-Canada trade remains tariff-free, as Trump continues to adhere to most of an existing North American free trade agreement.
But the Bank of Canada noted that the future of U.S. trade policy remained unsure, complicating the outlook moving forward.
“There is a lot of uncertainty out there,” Macklem said. “If we needed a reminder, we got one,” he said.
Macklem was referring to Trump’s surprise announcement that Washington was ending bilateral talks over an anti-tariff ad made by the Ontario government that ran on U.S. networks.
The breakdown in trade talks came about despite an apparently cordial meeting between Trump and Prime Minister Mark Carney at the White House earlier this month.
“We need to be humble about our forecasts,” Macklem added, nodding to ongoing volatility in the U.S.-Canada relationship.
‘The right level’
The central bank said Canada’s economy had contracted by 1.6 per cent in the second quarter “reflecting a drop in exports and weak business investment amid heightened uncertainty.”
But Macklem noted the central bank had limited tools available to help the economy absorb the shocks of U.S. protectionism. He hinted that interest rates were likely to remain unchanged over the coming months.
The bank “sees the current policy rate at about the right level to keep inflation close to two per cent while helping the economy through this period of structural adjustment,” Macklem said.
Desjardins economist Royce Mendes said that based on the language of Wednesday’s announcement “it would take a prolonged period of weakness or a new shock for central bankers to move off of the sidelines.”
In a note from CIBC, economist Andrew Grantham said he still saw room for a U.S.-Canada deal “to lower some sectoral tariffs and reduce uncertainty” surrounding the future of the North American free trade deal.
But, he added, additional cuts may prove necessary “if the outlook for trade doesn’t improve.”
