On Wednesday, the Bank of Canada reduced its key policy rate by 25 basis points to 3%, lowered growth projections, and expressed worries about potential U.S. tariffs leading to sustained high inflation.
Bank of Canada Governor Tiff Macklem stated that a prolonged trade conflict would significantly harm Canada's economy, with the threat of escalating tariffs clouding the economic forecast. Macklem emphasized the risk of a tariff-induced economic downturn.
In response to concerns about inflation, Macklem warned that a substantial tariff increase would cause immediate price hikes, potentially leading to persistent inflation if not managed effectively.
Regarding monetary policy adjustments, Macklem highlighted the need to guard against persistent inflation if inflationary pressures outpace deflationary risks, indicating a potential need for intensified policy focus without explicitly mentioning rate hikes.
The bank's monetary policy report outlined a scenario where retaliatory tariffs could reduce Canadian growth by 2.5 percentage points in the first year and an additional 1.5 percentage points in the second year.
Despite the Bank of Canada's sixth consecutive rate cut, inflation has remained stable near the bank's target range, while economic growth continues to be sluggish. The latest decision brought the policy rate to 3%, with markets anticipating a possible further rate cut in March.
Chief economist Doug Porter suggested the bank may need to take more assertive action in response to U.S. tariffs. Macklem acknowledged the challenge of balancing inflationary pressures and economic growth through rate adjustments.
The bank announced the conclusion of its quantitative tightening program in March, aimed at reducing excess liquidity introduced during the pandemic. Economic growth forecasts were revised downward, with increased projections for inflation in 2025 and 2026.
Canada's population decline, exacerbated by recent government measures, is expected to impact economic growth in the coming years.