Ottawa (Reuters) – The Bank of Canada (BOC) lowered its main key rate of 25 base points on Wednesday, to 3%, while reducing its growth forecasts and noting that a tariff war triggered by the United States could cause significant economic damage.
President Donald Trump promises to impose customs duties of 25% on Saturday on all imports from Canada, 75% of which are total exports are intended for the United States.
“A sustainable and generalized trade conflict would seriously harm economic activity in Canada,” said Governor Tiff Macklem at the opening of a press conference.
If Canada and other countries required customs duties of 25% in the United States as a retaliation, this could reduce Canada’s economic growth by 2.5 percentage points in the first year and 1.5 Additional percentage the second year, said the BOC, adding that it was not a forecast but a hypothetical scenario.
The drop in rate decided Wednesday is the sixth consecutive while inflation is maintained around the median of the target range from 1% to 3% but economic growth remains low.
“With inflation around 2% and an excess offer, the Governors’ Council has decided to reduce the key rate by 25 additional base points to bring it to 3%,” the central bank said in a statement.
The BOC challenge is that American customs duties could both increase inflation and reduce growth, two effects requiring contrary actions on rates.
“With a single tool – our key interest rate – we cannot rely on a lower production and higher inflation at the same time,” warned Tiff Macklem.
The BOC also announced that its quantitative tightening program, designed to drain the excess liquidity that it injected into the economy during the pandemic, would end in March.
The BOC, which was one of the most aggressive central banks in terms of rate reduction, brought back the country’s economic growth prospects to 1.8% in 2025, compared to 2.1% scheduled for October. The economy should grow by 1.8% in 2026, compared to 2.3% previously expected.
It also revised its inflation forecasts up, from 2.2% to 2.3% in 2025 and from 2.0% to 2.1% in 2026. But these projections do not take possible possible American customs duties.
(Written by Promit Mukherjee and David Ljunggren, Bertrand de Meyer, edited by Blandine Hénault)
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