Bank of Canada Cut key Interest Rate by 25 Basis-point to 2.75%

The Bank of Canada cut its key interest rate by 25 basis points on Wednesday to 2.75%, warning of a “new crisis” as it seeks to prepare the country’s economy for the damage that President Donald Trump’s tariffs could cause, according to Reuters.

The bank also emphasized that it would “treat any further changes” to interest rates cautiously, given the need to assess upward pressures on inflation from rising costs and downward pressures from weak demand.

This cut marks the seventh consecutive time the central bank has eased monetary policy, having cut its key interest rate by 225 basis points in nine months, making it one of the most aggressive central banks in the world.

“We ended 2024 on a solid economic footing,” Governor Tiff Macklem said in his opening remarks at a press conference. “But we are now facing a new crisis.”

“Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe. The uncertainty alone is already causing damage.”

Trump's erratic tariff policies and threats to a wide range of Canadian products have unsettled businesses, undermined consumer confidence, and hurt business investment.

The bank noted that a prolonged tariff war would lead to weaker GDP growth and higher prices, a difficult combination that makes it difficult to decide whether to raise or cut interest rates.

Macklem added that the rate-setting board will focus on assessing the timing and strength of both the downward pressure on inflation from a weak economy and the upward pressure from rising costs.

He added that the trade conflict will slow GDP growth in the first quarter and could derail the labor market recovery. He added that fears of the impact of tariffs on prices have already pushed up short-term inflation expectations.

Inflation is expected to average around 2.5% in March, up from 1.9% in January, with the expiration of a short-term sales tax holiday. The Canadian dollar continued its gains after the decision, rising 0.20% to 1.4403 against the US dollar. Two-year government bond yields fell 0.8 basis points to 2.521%.

Forex markets are betting that the chances of another 25 basis point rate cut at the next announcement on April 16 are 50/50.