Bank of Canada cuts interest rate, warns it can do little to offset U.S. tariff impact

Canada's central bank lowered its interest rate by 25 basis points to three per cent on Wednesday, as the Bank of Canada governor warned there was little he could do to negate the economic impact of U.S. tariffs imposed on Canadian imports.

"Monetary policy cannot offset the economic consequences of a protracted trade conflict," Bank of Canada governor Tiff Macklem told reporters

"The reality is the economy is going to work less efficiently. Canada's going to produce less. It's going to earn less. Monetary policy can't change that."

WATCH | Bank of Canada governor says trade fight with U.S. would be 'complex shock': 

Bank of Canada governor says trade fight with U.S. would be 'complex shock'

1 day ago

Duration 4:12

Bank of Canada governor Tiff Macklem says a protracted trade conflict with the U.S. would be a 'complex shock' for monetary policy, as the country would face both weaker growth and higher inflation.

U.S. President Donald Trump has threatened to impose a 25 per cent tariff on all Canadian imports, a move that could come as early as Feb. 1.

While economic policies can't provide a complete buffer from the consequences of a long-lasting trade war, they can hopefully help the economy adjust, Macklem said.

"With inflation back around the two-per-cent target, we are better positioned to be a source of economic stability," he said. "However, with a single instrument — our policy interest rate — we can't lean against weaker output and higher inflation at the same time."

Ongoing uncertainty

He noted there's still much uncertainty about new tariffs, including how long they will last, their scope or the retaliatory measures.

"Even when we know more about what is going to happen, it will still be difficult to be precise about the economic impacts because we have little experience with tariffs of the magnitude being proposed," he said.

But he said a long-lasting and broad-based trade conflict would badly hurt economic activity in Canada, with the higher cost of imported goods putting direct upward pressure on inflation.

The rate cut marks the sixth consecutive reduction since June, but a slowdown from the central bank's two previous heftier cuts. It slashed its key rate by half a percentage point in October and December as inflation hovered at or below its two-per-cent target.

'Battening down the hatches'

BMO chief economist Doug Porter wrote in a report Wednesday that the key takeaway is that the Bank of Canada will "intensely monitor the impact of tariffs and we shouldn't necessarily expect an immediate policy reaction to the start of a trade war."

The steps made today can be viewed as "battening down the hatches ahead of a possible trade war storm," he said.

"Next steps clearly are dependent on what unfolds on the trade front; we suspect while the bank may initially respond cautiously to a trade war, eventually it would be compelled to cut much more than the market currently expects," Porter said.

Simon Gaudreault, chief economist and vice-president of research​ for the Canadian Federation of Independent Business, said he thought the Bank of Canada was being extra careful not to point in any direction about the path for future rate cuts or a pause. 

"I think that reflects, again, the super-high uncertainty that they are seeing."

RSM Canada economist Tu Nguyen said if tariffs were implemented and Canada responded with measures of its own, the central bank would face a challenging task.

"Tariffs could raise prices, which would prompt rate hikes, but aggregate demand would weaken and could lead to rate cuts," she wrote on the RSM Canada website.