Bank of Canada Slashes Interest Rates Again—But Is a Storm Brewing?
The Bank of Canada has once again lowered its key interest rate, cutting it by 0.25 percentage points to 3.0%. This marks the sixth consecutive rate cut since June, a move aimed at keeping the economy on track as inflation hovers around the central bank’s 2% target. But while the rate cut offers a boost, a dark cloud looms over Canada’s economic future—potential U.S. tariffs.
A Growing Economy—For Now
Bank of Canada Governor Tiff Macklem noted that recent interest rate cuts are beginning to have the desired effect, with signs that economic activity is gaining momentum. However, while lower borrowing costs provide a lift, the central bank remains cautious, especially with external risks on the horizon.
One of the biggest threats? A potential trade war with the U.S.
The Tariff Threat: What’s at Stake?
U.S. President Donald Trump has hinted at imposing sweeping 25% tariffs on all Canadian goods. While no official decision has been made, the mere possibility of such measures has already injected uncertainty into Canada’s economic forecast.
In its latest monetary policy report, the Bank of Canada revised its GDP growth projections downward. The economy is now expected to grow by just 1.8% in 2025 and 2026—down from previous estimates of 2.1% and 2.3%. Slower population growth, shifting federal immigration targets, and declining business investment due to policy uncertainty all contribute to this weaker outlook.
What Happens If Tariffs Become a Reality?
The Bank of Canada’s report assumes that the U.S. will not go through with the proposed tariffs. However, if Trump moves forward with them, the outlook could become significantly worse.
Under a worst-case scenario—where Canada retaliates with dollar-for-dollar tariffs—GDP could shrink by a staggering 2.4% in the first year. Such a sharp decline could be enough to push Canada into a recession, a stark contrast to the 1.8% growth currently projected for 2025.
Moreover, inflation could surge. If the cost of tariffs is passed on to consumers over three years, inflation could spike by 0.8% in the first year alone, followed by a 1.3% increase in the next.
How Will the Bank of Canada Respond?
Despite these looming risks, the Bank of Canada may have limited room to cut rates further if inflation surges due to tariffs. Stephen Brown, Deputy Chief North America Economist at Capital Economics, warns that while rate cuts have been expected, the central bank might be forced to hold back if inflation spirals out of control.
CIBC Capital Markets Chief Economist Avery Shenfeld argues that interest rates remain “too high,” particularly given the soft labour market and easing inflation. He predicts the bank will cut rates by an additional three-quarters of a percentage point in 2025, though that outlook could change if tariffs disrupt the economy.
Looking Ahead: More Cuts or a Policy Shift?
The Bank of Canada has hinted at a continued path of gradual rate cuts through 2025, but there are now more unknowns than ever. The central bank’s latest policy statement omitted previous guidance that suggested it would evaluate the need for rate reductions “one decision at a time.” This shift suggests a growing uncertainty about how the economy will evolve—especially if a trade war erupts.
For now, the rate cut offers relief to borrowers, but uncertainty remains. Will Canada dodge a trade war, or are we heading toward a recession fueled by tariffs? The coming months will be critical in determining whether this rate cut was a stepping stone to stability—or a prelude to economic turbulence.