Bank of Canada Reduces Key Interest Rate to 3% in Response to US Tariff Concerns
OTTAWA—The Bank of Canada announced a 25 basis point reduction of its key interest rate, marking its sixth consecutive decrease. The Bank cautioned that the imposition of U.S. tariffs introduces a significant level of uncertainty.
In the Jan. 29 update, Bank of Canada Governor Tiff Macklem expressed concern over U.S. tariffs, stating that they could have a disruptive impact on the Canadian economy and overshadow the economic outlook.
The Bank’s key interest rate now stands at 3 percent. It also disclosed plans to discontinue qualitative tightening and resume asset purchases in March to stabilize its balance sheet for the year and subsequently expand it modestly in line with economic growth.
Macklem pointed out that the Bank of Canada lacks crucial information on the nature, duration, and potential responses to these tariffs. He acknowledged the challenges in predicting their impacts due to the unprecedented scale of the proposed measures.
Macklem emphasized that protracted trade disputes could severely impact economic activity in Canada, leading to increased inflation from higher imported goods costs. He highlighted the role of businesses and households in both the U.S. and Canada in adapting to elevated import prices to determine the magnitude and timing of resulting effects on output and inflation.
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Macklem stressed that monetary policy alone cannot offset the negative effects of tariffs, such as heightened inflation and weakened economic output. He highlighted the need to carefully evaluate the downward pressure on inflation resulting from economic weakness against the upward pressure from increased input prices and disruptions in the supply chain.
Macklem reported that inflation in Canada has remained near 2 percent, with stabilized business and consumer expectations and gradual decreases in shelter price inflation. The Bank expects some inflation volatility due to temporary tax measures but anticipates inflation to stay close to its 2 percent target over the next two years.
Macklem also noted the positive impact of lower interest rates on economic activity, particularly in housing and large-item spending. However, he raised concerns about the soft labor market, the slow pace of job creation compared to workforce growth, and a 6.7 percent unemployment rate in December.
The Bank of Canada forecasts a growth in GDP from 1.3 percent in 2024 to 1.8 percent in 2025 and 2026 due to lower interest rates and increasing incomes. However, the expected GDP growth has been revised lower than the October projection due to Ottawa’s reduced immigration targets, which have previously boosted consumption.
