OTTAWA (Reuters) – The Banque du Canada (BOC) lowered its main key rate of 25 basic points on Wednesday, to 2.75%, and warned of “a new crisis” in an attempt to prepare the economy for the impact of new customs rights wanted by the American president, Donald Trump.

The bank also said that it “would cautiously proceed to any new modification” of the rates, given the need to assess both the upward pressures on inflation due to the increase in costs and the downward pressures due to the weakening of demand.

“The Canadian economy began 2025 in good position (…) However, increased trade tensions and customs duties imposed by the United States will probably slow down the progression of economic activity and increase inflationary pressures in Canada,” the BOC wrote in a communnocated.

It is the seventh consecutive time that the Canadian Central Bank softens its monetary policy, with a reduction of 225 basic points of its guiding rates in the space of nine months, which makes the BOC one of the most aggressive central banks in the world.

“We have finished 2024 on a solid economic basis. But we are now faced with a new crisis,” Tiff Macklem, the Governor of the BOC.

“Depending on the scale and duration of the new American customs duties, the economic impact could be serious. Uncertainty alone is already prejudicial,” he added.

Donald Trump’s policy in terms of customs duties, marked with flip-flops and threats to a wide range of Canadian products, have put companies on alert, shaken consumer confidence and the investment of companies.

The BOC estimates that an prolonged customs war would cause low growth in gross domestic product (GDP) and high prices, an explosive cocktail that makes any decision on rates difficult.

The BOC Governors’ Council will endeavor to assess the time and strength of the downward pressures on inflation due to a slowdown in the economy and upward pressures linked to higher costs, said Tiff Macklem.

Concern about employment

The trade conflict with the United States could slow down the growth of GDP in the first quarter and disrupt the recovery of the job market, he added, noting that the fear of the impact of the prices had already increased short-term inflation forecasts.

Inflation should be around 2.5% in March, against 1.9% in January, while VAT relief measures end.

The United States is the main trading partner in Canada and absorb almost 75% of Canadian exports.

A separate special survey of the bank with companies and households, conducted from the end of January to the end of February, shows that many households are concerned about employment safety, especially in the sectors exposed to trade with the United States.

The threat of customs duties forced companies to revise their sales forecasts downwards. Some companies have difficulty obtaining credits, and the weakness of the currency has made imports more expensive, the survey said.

This results in a reduction in business and investment projects for businesses.

(Written by Promit Mukherjee and David Ljunggren, Claude Chendjou, edited by Blandine Hénault)

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