Bank of Canada Cuts Key Rate to 2.75% Amid Economic Uncertainty

Bank of Canada Cuts Key Rate to 2.75% Amid Economic Uncertainty

Rate Cut and Policy Caution

The Bank of Canada reduced its key policy rate by 25 basis points to 2.75%, marking the seventh consecutive rate cut. The central bank emphasized the need to proceed cautiously with further changes, balancing inflationary pressures from rising costs against weaker demand.

Economic Concerns and Trade Uncertainty

Governor Tiff Macklem warned of growing economic risks, stating, “We ended 2024 on a solid economic footing. But we’re now facing a new crisis.” He highlighted potential economic damage from recent U.S. tariff policies and the uncertainty affecting businesses and consumers.

Tariff Impact and Retaliatory Measures

The U.S. imposed a 25% tariff on all Canadian steel and aluminum products, prompting Canada to introduce C$29.8 billion ($20.68 billion) in retaliatory tariffs. The central bank noted that an extended trade war could slow GDP growth and elevate prices, complicating future rate decisions.

Inflation and Currency Market Reactions

Inflation is projected to rise to 2.5% in March from 1.9% in January, partially due to the expiration of a temporary sales-tax break. Following the rate cut, the Canadian dollar strengthened by 0.20% to 1.4403 against the U.S. dollar, while two-year government bond yields fell by 0.8 basis points to 2.521%.

Future Rate Decisions and Economic Outlook

The likelihood of another 25-basis-point rate cut at the next policy announcement on April 16 stands at approximately 45%. Analysts suggest that further rate cuts will depend on how inflation expectations respond to the ongoing trade situation.

Business and Consumer Sentiment

A special Bank of Canada survey conducted from January to February revealed concerns over job security, particularly in sectors affected by U.S. trade policies. Businesses have lowered their sales forecasts, faced credit challenges, and scaled back hiring and investment plans due to currency fluctuations and higher import costs.

Monetary Policy Response

Governor Macklem stressed that monetary policy cannot fully counteract the effects of a trade war but must ensure inflation remains controlled. “What it can and must do is ensure that higher prices do not lead to ongoing inflation,” he stated.

“Bank of Canada Cuts Key Rate to 2.75% Amid Economic Uncertainty” “Bank of Canada Cuts Key Rate to 2.75% Amid Economic Uncertainty” “Bank of Canada Cuts Key Rate to 2.75% Amid Economic Uncertainty”