The Bank of Canada has lowered interest rates by 25-basis points, saying that the country is “facing a new crisis” due to the ongoing trade battle with the neighbouring U.S.
As was widely expected, Canada’s central bank reduced its trendsetting overnight interest rate to 2.75% from 3%. It was the seventh consecutive interest rate cut since last June.
However, in announcing the rate cut, Bank of Canada Governor Tiff Macklem warned that the central bank “cannot offset the impacts of a trade war.”
The latest rate cut came on the same day that the U.S. imposed 25% tariffs on all steel and aluminum products from Canada.
Last year, exports of steel and aluminum accounted for $40 billion in sales for businesses across Canada.
Further protectionist measures are expected on April 2, when U.S. President Donald Trump announces global reciprocal tariffs, which are expected to impact items ranging from automobiles to agriculture.
“Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe,” Macklem said at a news conference in Ottawa.
However, the governor also noted that there was room to lower interest rates given that inflation in Canada is near the central bank’s 2% annualized target and that the domestic economy had grown 2.6% in the fourth quarter of last year.
Looking ahead though, Macklem said that the Bank of Canada will have to “proceed carefully” and assess the “upward pressures on inflation from higher costs.”
A long, drawn-out trade war with the U.S. can be expected to decrease the supply of goods, increase the price of goods for consumers, and weaken people’s desire to spend, noted the central bank.
“The trade conflict with the United States can be expected to weigh on economic activity, while increasing prices and inflation,” said Macklem.
