Bank of Canada Lowers Interest Rate to 2.75% Following New Tariffs - March 12, 2025
The Bank of Canada has announced a 25-basis-point reduction to its benchmark interest rate, bringing it down to 2.75%. This marks the seventh consecutive rate cut by the central bank. The decision comes just hours after new U.S. tariffs on Canadian steel and aluminum were introduced. The new prime rate now stands at 4.95%.
Economic Challenges Following Tariff Uncertainty
Bank of Canada Governor Tiff Macklem stated that while the economy entered 2025 on solid footing, recent tariff policies have created new economic challenges. Inflation has remained close to the bank's 2% target since last summer, but business and consumer confidence have been shaken due to the ongoing trade uncertainty with the United States.
"In recent months, the uncertainty caused by shifting U.S. trade policies has impacted household spending and business investment decisions," Macklem said. "Given this environment and inflation remaining near target, the Governing Council decided to lower the policy rate by 25 basis points."
Macklem also cautioned that ongoing trade disputes with the U.S. could contribute to rising inflation in the coming months. He noted that businesses, particularly in manufacturing and sectors reliant on discretionary consumer spending, have revised their sales forecasts downward. Access to credit has also tightened for some businesses, and a weaker Canadian dollar has made importing equipment more expensive. As a result, many companies have scaled back hiring and investment plans.
Are We Heading Toward a Recession?
When asked about the possibility of a recession, Macklem stated that much depends on how U.S. trade policy evolves in the coming months.
Senior Deputy Governor Carolyn Rogers added that while the bank does not have an official recession forecast, there are concerning economic signals. "The economy performed well at the end of last year, which would have been encouraging if not for the uncertainty ahead. Businesses are slowing investment, hiring is down, and Canadians are saving more while spending less. These factors do not support strong economic growth."
Industry Experts Weigh In
Andrew DiCapua, principal economist at the Canadian Chamber of Commerce, warned that the new tariffs on steel and aluminum could significantly impact the economy. "While the Bank of Canada pointed to recent economic growth, that momentum may not hold if tariffs continue to escalate. The added uncertainty is already affecting business sentiment, making a lower policy rate necessary to support the economy."
Despite concerns over tariffs, Canada’s economy showed strength in late 2024. The economy grew by 2.6% in the fourth quarter, and employment gains between November and January brought the unemployment rate down to 6.6%.
More Rate Cuts on the Horizon?
Looking ahead, the Bank of Montreal's Chief Economist, Doug Porter, suggested that the central bank may continue easing monetary policy depending on trade developments. BMO currently forecasts three more rate cuts in upcoming meetings.
"The direction of future policy will largely depend on how the trade situation unfolds. If tariffs remain in place for an extended period, their impact on economic growth will outweigh inflation concerns, keeping the Bank of Canada in an easing stance," Porter explained.
Tu Nguyen, an economist at RSM Canada, echoed this sentiment, noting that additional tariffs in April could limit the central bank’s options. "If further trade measures are introduced next month, we can expect another 25-basis-point cut to help offset the economic strain. At this stage, tariffs are causing a temporary rise in prices rather than fundamentally altering inflation dynamics."
Last month, Governor Macklem warned that prolonged tariffs could have long-term consequences for Canada’s economy. "During the pandemic, we experienced a steep downturn followed by a strong recovery. This time, if tariffs are widespread and long-lasting, there won’t be a quick rebound."
He further explained that while the economy might eventually return to its previous growth rate, the overall level of economic output could remain permanently lower. "This isn’t just a short-term shock—it’s a structural shift that could reshape our economic landscape."
As businesses and policymakers navigate these uncertainties, all eyes will be on how trade negotiations and economic policy evolve in the months ahead.
Navigating the Changing Market
With interest rates shifting and trade uncertainties affecting the market, now is the time to stay informed and proactive. Whether you're buying, selling, or investing in real estate, understanding how these changes impact your financial strategy is crucial.
Our team is here to guide you through these fluctuations, providing expert insights and tailored solutions to help you make the best decisions. Reach out to us today to discuss how we can help you navigate the evolving market with confidence.