Bank of Canada Warns of Economic Risks Amid U.S. Tariff Threat
The Bank of Canada delivered another interest rate cut on Wednesday but warned that Canada’s economy could face significant challenges if the U.S. follows through on its threat to impose blanket tariffs on Canadian goods.
In a worst-case scenario outlined by the central bank, these tariffs could trigger a recession later this year while simultaneously driving inflation higher.
The Bank of Canada reduced its benchmark interest rate by 25 basis points to 3.0%, marking its sixth consecutive cut—an expected move among economists and financial markets.
Uncertainty Over Future Rate Cuts
BMO chief economist Doug Porter noted that this move cements the Bank of Canada’s position as “the most aggressive cutter in the world.” However, the central bank offered little guidance on future rate decisions.
“There’s a lot of uncertainty out there, and it just didn’t seem useful to provide guidance,” said Bank of Canada Governor Tiff Macklem.
Trump’s Tariff Threats Cloud Economic Outlook
Much of the central bank’s focus was on the potential economic fallout from U.S. President Donald Trump’s proposed 25% tariffs on Canadian and Mexican goods, set to take effect on Feb. 1.
“The possibility of a trade conflict triggered by U.S. tariffs is a major uncertainty,” Macklem said. “This could be very disruptive to the Canadian economy and is clouding the economic outlook.”
The central bank warned that “if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested.”
James Orlando, director of economics at TD Bank, said that Canada had been poised for economic growth this year, with inflation under control and previous rate cuts expected to boost activity. However, Trump’s tariff threats have created new uncertainty.
“This was supposed to be a year of economic revival in Canada,” Orlando said. “And now, with Trump, that’s all uncertain.”
Potential Impact on Inflation and Growth
Macklem acknowledged that the exact impact of tariffs remains unclear, as factors such as the scope, duration, and Canada’s response are still unknown.
However, he cautioned that “a long-lasting and broad-based trade conflict would badly hurt economic activity in Canada, while the higher cost of imported goods would directly increase inflation.”
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