Bank of Canada governor Tiff Macklem said Friday that the economic damage from a trade conflict with the U.S. would be “structural.”
In a speech before the Mississauga Board of Trade and the Oakville Chamber of Commerce, Macklem addressed trade tensions with the U.S. for the first time since the latest interest rate decision on Jan. 29, before U.S. President Donald Trump signed an executive order imposing tariffs on imports from Canada, Mexico and China.
“Increased trade friction with the United States is a new reality,” he warned. “Unlike the pandemic, if tariffs persist there will be no economic bounceback.”
While Canada obtained a tariff reprieve until March, the prospect of a trade war puts the Bank of Canada in a bind, economists say, as it must weigh the risks and expectations of a slowing economy versus persistent inflation.
“Central banks can do little to mitigate the damage caused by a trade war,” admitted Macklem. “Our role will be to balance the upside risks to inflation from higher costs with the downside risks from weaker demand.”
Some experts think central bankers will choose to be more aggressive with rate cuts if a tariff war breaks out, despite concerns around creeping inflation.
“We think the Bank of Canada is ultimately going to want to provide support to the Canadian economy,” said Randall Bartlett, deputy chief economist at Desjardins, adding that he expects the bank to reduce the policy rate to 1.5 per cent by the beginning of 2026 if Trump’s 25 per cent tariffs are, in fact, implemented.
If the tariffs end up being lower — around 10 per cent for most imports from Canada — Bartlett thinks the interest rate would fall to two per cent by 2026.
Meanwhile, economists at TD expect the central bank to front-load interest rate cuts in the first half of 2025, bringing its key rate to 2.25 per cent from the current three per cent by spring, according to a report published Wednesday.
“The Bank of Canada has already proven more aggressive when it comes to rate cuts,” the report stated, “we suspect this will remain characteristic with an economic forecast closer to treading water than south of the border.”
With the fate of tariffs still up in the air, however, economists say it is likely the Bank of Canada will not cut its key rate at the next meeting on March 12.
“It doesn’t want to cut too much too quickly in order to get ahead of a threat that may not actually be acted on,” explained Bartlett.
This is a developing story.
