OTTAWA – Prices will rise, the economy will suffer and the Bank of Canada can’t lower interest rates enough to shield Canadians from the worst impacts of a prolonged trade war with the United States.
That was the stark message Wednesday from the head of the Bank of Canada after the central bank delivered another quarter-point cut to its benchmark interest rate as uncertainty over duelling tariffs with the United States persists.
The policy rate now stands at 2.75 per cent after the central bank’s seventh consecutive rate cut. Later in the day, the country’s Big Six banks all announced they would decrease their prime rates, which are used to set interest rates on other loans, by a quarter-point to 4.95 per cent from 5.20 per cent, effective Thursday.
Bank of Canada governor Tiff Macklem called the trade dispute with the U.S. a “crisis” and warned the economic damage could be “severe,” depending on how steep tariffs are and how long they’re kept in place.
He said there are already signs consumers and businesses were hunkering down in recent weeks, and if the dispute continues, Canada’s economy will take a hit in the second quarter of 2025.
“The pervasive uncertainty created by continuously changing U.S. tariff threats has shaken business and consumer confidence,” Macklem said during a press conference after the rate announcement.
“The uncertainty alone is already causing harm.”
Avery Shenfeld, chief economist with CIBC Capital Markets, said in a note to clients on Wednesday that evidence Canada’s economy was heating up heading into 2025 likely would’ve been enough for the central bank to take a “wait-and-see approach” on further cuts — but then came the trade war.
RBC senior economist Claire Fan said in an interview that the latest cut showed the Bank of Canada was willing to step in to soften the “real and tangible impact” on the economy already stemming from the tariffs.
On Wednesday, U.S. President Donald Trump escalated the trade war he kicked off on March 4 as 25 per cent tariffs on imports of Canadian steel and aluminum entering the U.S. took effect.
Later in the day, Canada announced nearly $30 billion in retaliatory tariffs in response. Those are set to begin at 12:01 a.m. ET on Thursday.
Macklem said Canadians can expect to pay more in the months ahead because of the trade dispute, first on perishable foods like fresh fruit and vegetables from the U.S. while durable goods with longer production cycles could see costs rise later.
The Bank of Canada pointed out that a weak loonie is driving up the price of imports at the same time many businesses are seeking new suppliers outside the U.S. — a potentially costly endeavour.
“The reality is, some prices are going to go up. We can’t change that,” Macklem said.
Nearly half of businesses in the central bank’s survey suggested they’ll be ready to quickly pass higher costs tied to tariffs onto consumers, especially if they’re transparent with consumers about why prices are rising.
Macklem said the central bank will use monetary policy to make sure the price shocks from tariffs don’t turn into a lasting bout of inflation.
Those surveys conducted from late January through February suggested Canadians are planning to spend less as they worry about losing their jobs because of the trade dispute, particularly in sectors like manufacturing that are vulnerable to tariffs.
Some 40 per cent of business leaders surveyed by the central bank said they’re scaling back hiring plans.
“What businesses are telling us is, they’re slowing investment, they’re slowing hiring. Canadians are saving more, spending less. So all of those things don’t bode well for growth,” said senior deputy governor Carolyn Rogers on Wednesday.
Macklem said the central bank will “proceed carefully” with future rate changes as it weighs both the drag on economic growth and upward pressures in prices tied to the trade war.
Money markets as of Wednesday afternoon were pricing the odds of another cut at the Bank of Canada’s next meeting on April 16 at around 45 per cent, according to LSEG Data & Analytics.
Shenfeld said he expects the bank will put more weight on growth risks than inflation in the short-term, leaving room for two more interest rate cuts by June.
Fan said RBC is also expecting two additional rate cuts to take the Bank of Canada’s policy rate down to 2.25 per cent around mid-year.
She warned there won’t be a “race to the bottom” for interest rates as the central bank balances the need for more stimulative monetary policy with its mandate to keep inflation at the two per cent target.
Instead, she looks to governments to provide fiscal relief for businesses and affected workers in the trade war, lifting some of the pressure off the Bank of Canada to deliver stimulus through additional rate cuts.
“Expecting the bank to reduce rates all the way to zero is not the correct framework when it comes to thinking about their future rate decisions,” Fan said.
This report by The Canadian Press was first published March 12, 2025.
