In a widely anticipated move, the Bank of Canada lowered interest rates by a quarter of a percentage point on Wednesday, amid escalating trade tensions with the United States, describing U.S. tariffs as a “new crisis” threatening the Canadian economy.

The central bank decided to reduce the overnight target rate to 2.75%, the lowest level since September 2022, in an effort to support the economy in the face of the escalating trade war's repercussions.

Trade tensions threaten the economy and inflation

In an official statement, the bank warned that “increasing trade tensions and U.S. tariffs” could slow the pace of economic activity and increase inflationary pressures in Canada. It confirmed that the uncertainty arising from the constantly changing U.S. tariff decisions hampers companies' plans for hiring and investment, and limits consumer spending.

McLem: “We are facing a new crisis”

Teff McLem, Governor of the Bank of Canada, described the current situation as a “new crisis,” noting that the economic impact of this trade war could be significant depending on the “scope and duration of the implementation of the new U.S. tariffs.”

McLem stated in remarks during a press conference:

“Although economic growth in Canada came in stronger than expected, the trade uncertainty makes us proceed with caution. We will need to assess the upward pressures on inflation arising from rising costs and the downward pressures stemming from weak demand.”

Escalation of tariffs between the two countries

The intensity of the trade dispute between Canada and the United States escalated after the Trump administration imposed a 25% tariff on most Canadian and Mexican goods last week. Trump threatened to impose new tariffs on Canadian lumber and dairy products, while a 25% tariff on Canadian steel and aluminum came into effect on Wednesday morning.

In response, the Canadian government announced retaliatory tariffs on $30 billion Canadian (equivalent to $20.8 billion USD) worth of U.S. goods on March 4. It announced a new package of tariffs worth $30 billion Canadian on Wednesday, in response to the continued imposition of tariffs on steel and aluminum by the United States.

The central bank adopts a cautious policy

McLem confirmed that the central bank will proceed with caution in the coming period, noting that future decisions regarding interest rates will depend on assessing inflationary pressures and the impact of the trade war on economic activity in Canada.

The central bank concluded its statement by emphasizing that “increasing trade tensions could disrupt the recovery of the labor market,” necessitating continued monitoring of developments and timely decision-making.