The Bank of Canada reduced its key policy interest rate by 25 basis points to 2.75% on Wednesday. The central bank cited inflationary pressures, economic uncertainty, and tariffs imposed by former U.S. President Donald Trump as reasons for the decision.
According to Reuters, policymakers stated they would “proceed carefully with any further changes” while assessing the impact of rising costs on inflation and weaker demand on economic activity.
Seven Consecutive Rate Cuts in Nine Months
This latest rate reduction marks the seventh consecutive cut in the past nine months. The Bank of Canada has now lowered rates by a total of 225 basis points, making it one of the most aggressive central banks globally in its approach to monetary easing.
Governor Tiff Macklem noted that Canada ended 2024 with a strong economy but now faces new trade challenges that could slow first-quarter GDP growth and disrupt job market recovery.
Trump’s Tariffs and Canada’s Retaliation
Trump imposed a 25% tariff on Canadian steel and aluminum products, significantly impacting trade relations between the two countries.
In response, Canada announced C$29.8 billion ($20.68 billion) in retaliatory tariffs, which will take effect on Thursday. The central bank warned that a prolonged trade dispute could weaken GDP growth and drive up prices, making future monetary policy decisions more complex.
Market Reactions and Currency Impact
Following the rate cut, the Canadian dollar strengthened by 0.20%, reaching 1.4403 against the U.S. dollar. Meanwhile, yields on two-year government bonds fell by 0.8 basis points to 2.521%.
Currency markets currently price in a 45% chance of another 25-basis-point rate cut at the Bank of Canada’s next announcement on April 16.
Uncertain Economic Outlook
Despite ongoing monetary easing, Canada faces growing economic uncertainties. The Bank of Canada’s next steps will depend on inflation trends, trade developments, and economic performance in the coming months.
