By Promit Mukherjee and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada on Wednesday trimmed its key policy rate by 25 basis points to 3%, cut growth forecasts and said it was concerned that U.S. tariffs could stoke persistently high inflation.
U.S. President Donald Trump is promising to impose a 25% tariff on all imports from Canada on Saturday. Canada sends 75% of all goods and services exports to the United States.
“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada,” said Bank of Canada Governor Tiff Macklem. The prospect of such a war is clouding the economic outlook.
Macklem said that a big increase in tariffs would have an initial, one-off impact on Canada that monetary policy could not do much to counter.
“What we don’t want to see though is that initial price level increase start to feed through broadly to other prices and wages and then become persistent inflation,” he said.
If inflationary pressures come through faster than deflationary pressures, “monetary policy is going to have to be more focused on guarding against persistent inflation”, he said, without specifically mentioning higher rates.
Macklem warned that a tariff war triggered by the United States could cause major economic damage.
Noting a hypothetical scenario, the bank said in its monetary policy report that if Canada and other nations slapped a retaliatory 25% tariff on the United States, this could cut Canadian growth by 2.5 percentage points in the first year and another 1.5 percentage points in the second year.
Wednesday’s cut marked the sixth time in a row that the bank has reduced borrowing costs. Inflation has consistently stayed around the mid-point of the bank’s 1-3% target range but economic growth is still sluggish.
“With inflation around 2% and the economy in excess supply, Governing Council decided to reduce the policy rate a further 25 basis points to 3%,” the bank said in a statement.
The Canadian dollar was weaker right after the decision but later traded near flat against the U.S. Dollar.
Money markets see an over 43% chance of another 25-basis-point cut at the BoC’s next monetary policy decision announcement on Mar. 12.
“The Bank of Canada would be in a tough situation but our view is that they would become more aggressive in terms of rate cuts if that’s (U.S. tariffs) what we’re faced with,” said Doug Porter, chief economist at BMO Capital Markets.
The bank’s challenge is that U.S. tariffs might both drive up inflation – in theory prompting the need for higher rates – and also cut growth, which could on paper mean more stimulus in the form of lower rates.
“With a single tool – our policy interest rate – we can’t lean against weaker output and higher inflation at the same time,” Macklem said. The bank though could help the economy adjust, especially given that inflation is low, he said.
The bank also announced that its quantitative tightening program, designed to drain the excess liquidity it pumped into the economy during the pandemic, would end in March.
The BoC, which has been among the most aggressive top central banks in cutting rates, trimmed the country’s economic growth outlook to 1.8% in 2025 from the 2.1% predicted in October. The economy will grow by 1.8% in 2026, down from growth of 2.3% forecast earlier.
The central bank lifted its forecast for inflation to 2.3% from 2.2% in 2025 and to 2.1% from 2.0% for 2026. The projections do not take into account possible U.S. tariffs.
Canada’s economy has been shrinking on a per-capita basis for six consecutive quarters and most of the growth observed has been supported by an increase in population.
With the federal government’s new curbs on immigration, Canada is likely to see a population decline of 0.2% in both 2025 and 2026.
(Reporting by Promit Mukherjee and David Ljunggren in Ottawa; Additional reporting by Nivedita Balu and Fergal Smith in Toronto; Editing by Mark Porter and Aurora Ellis)
