The Bank of Canada has announced a 25 basis point reduction to its key interest rate, lowering it to 3%.
“Lower interest rates are boosting household spending and the economy is expected to strengthen gradually and inflation to stay close to target,” the central bank said in a statement on Wednesday.
The move, anticipated by economists, marks the sixth consecutive cut in a series of reductions that began in June 2024.
The backdrop for this rate includes mixed economic indicators. The annual inflation fell below the bank’s 2% target in December, down to 1.8%, however, GDP growth of 1.7% for the fourth quarter of 2024 is below its forecast of 2%.
The central bank's easing cycle comes amid heightened trade tensions with the United States, particularly concerning threats from US President Donald Trump to impose tariffs on Canadian goods starting as soon as February 1.
Setting aside the US tariffs threat, the bank sees the upside and downside risks around the outlook as “reasonably balanced.” If tariffs are introduced, “the resilience of Canada’s economy would be tested,” it added.
During a press conference on Wednesday, Bank of Canada governor Tiff Macklem warned there was little the central bank could do to offset the economic impact of US tariffs.
"Monetary policy cannot offset the economic consequences of a protracted trade conflict," Macklem told reporters.
"The reality is the economy is going to work less efficiently. Canada's going to produce less. It's going to earn less. Monetary policy can't change that."