Bank of Canada cuts rate amid ‘new crisis’ of trade war with the U.S.

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OTTAWA — Bank of Canada cuts rate amid ‘new crisis’ of trade war with the U.S.

The Bank of Canada has cut its policy rate by 25 basis point to 2.75 per cent as a new front is opened in the trade war between the United States and Canada.

Overnight, the U.S. began putting 25 per cent tariffs on all steel and aluminum products coming from Canada. Last year, exports of those metals accounted for nearly $40 billion dollars in sales for businesses in Canada.

Further protectionist measures are expected on April 2, when U.S. President Donald Trump announces global reciprocal tariffs which are expected to impact a broad swath of industry from automobiles to agriculture.

While announcing the rate cut, Bank of Canada Governor Tiff Macklem warned Canada is “facing a new crisis,” and that the central bank “cannot offset the impacts of a trade war.”

”Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe.” Macklem said that the “pervasive uncertainty” has already shaken business and consumer confidence.

Macklem pointed out that inflation remains close to the bank’s two per cent target and that the Canadian economy had actually grown by 2.6 per cent in the fourth quarter of 2024.

But, those gains could be derailed by uncertainty.

Since Trump’s inauguration, the on and off again tariff decisions have roiled the markets. The largest drop occurred just two days earlier this week, after the president acknowledged that his administration’s tariff measures could tip the U.S. economy into a recession.

Then on Tuesday, Trump threatened to double the tariffs on Canadian metals before Ontario Premier Doug Ford pulled back his decision to put a 25 per cent surcharge on electricity sold to customers in New York, Michigan and Minnesota.

”Looking ahead, the trade conflict with the United States can be expected to weigh on economic activity, while increasing prices and inflation,” Macklem said.

A prolonged trade war could decrease the supply of goods, increase the price of goods for Canadians while weakening their desire to spend.

Macklem told reporters the bank will have to “proceed carefully” to assess both the “upward pressures on inflation from higher costs and the downward pressure from demand.”

Surveys finds declining consumer and business confidence

From Jan. 29 to Feb. 28, the Bank of Canada surveyed hundreds of businesses and households regarding how the economic climate was impacting their spending decisions.

In its survey of consumer expectations, which involves 2,500 households, the bank found that more people were worried more about their job security and financial health and were planning to spend less.

Employment concerns were highest the industries that relied most on trade. Of the people surveyed, workers in the mining and oil and gas and manufacturing sectors felt most vulnerable to job losses.

The bank’s survey of a cross section of 100 businesses found that many had lowered their sales outlooks - the decline was most prominent in the manufacturing sector. Heightened trade uncertainty has also led many businesses to scale back their hiring and investment plans.

The bank found that credit has become more difficult for businesses to access and that the cost of imported capital goods such as equipment and machinery was rising.

Contributing to the high cost of supplies is the depreciation of the Canadian dollar, which has been on a downward trend since October 2024.

Because the U.S. has also increased tariffs on China and has plans to expand its policy to Mexico and the European Union - Canadian businesses have limited options to control costs. Plans to diversify product sources to avoid tariffs and mitigate trade disruptions involves turning to new suppliers which are often costlier.

According to the bank, about half of all businesses surveyed plan to increase prices if tariffs are imposed on either their supplies or their products.

The bank’s survey of consumers and businesses was conducted before March 4, before the White House dropped its decision implement 25 per cent tariffs related to Canada’s border security and efforts to stop the flow of fentanyl into the United States. Those fentanyl-related tariffs will be revisited in April, while tariffs on steel and aluminum are already underway.