Ottawa (AFP) – The Bank of Canada on Wednesday held its key lending rate at 2.75 percent, pausing a stream of recent cuts due to shifting US trade policy and tariffs. “The major shift in direction of US trade policy and the unpredictability of tariffs have increased uncertainty, diminished prospects for economic growth, and raised inflation expectations,” the central bank said in a statement. Its rate pause followed seven consecutive rate cuts since last summer that have considerably lowered borrowing costs.
The nation entered 2025 on a solid footing, after ending the previous year with strong growth and inflation easing toward the bank’s 2.0 percent target. But US President Donald Trump’s announcements of tariffs, erratic backtracks, and threats of escalation have rocked the global economy. Canada avoided the latest batch of tariffs unveiled on April 2, but was hit with other levies on goods that do not comply with a North American free trade pact, as well as on steel and aluminum, and some automobiles. Trump has also threatened tariffs on lumber, semiconductors, and pharmaceutical products.
“A lot has happened since our March decision five weeks ago. But the future is no clearer,” Bank of Canada Governor Tiff Macklem said. “We still do not know what tariffs will be imposed, whether they’ll be reduced or escalated, or how long all of this will last,” he told a news conference, adding that more information was needed before making the bank’s next move in June.
CIBC Economics’s Avery Shenfeld said if Canada’s economy showed signs of contracting in the coming months, the Bank of Canada “will feel more pressure to respond with a rate cut at that time.” Royce Mendes, an analyst at Desjardins, is also expecting a cut in June but was more optimistic on trade, saying he believed “there is some momentum behind the move towards better relations between the US and Canada.”
In a statement, the central bank painted a dire economic picture, including the worst-case scenario of a protracted trade war with the United States—Canada’s biggest trading partner—triggering a recession and sending prices soaring. It noted that financial markets are in turmoil, oil prices have dropped, and the Canadian dollar has appreciated as a result of broad US dollar weakness.
Tariff announcements and uncertainty have pulled down consumer and business confidence, leading to lower consumption and business spending, along with a decline in employment and slower hiring, the bank said. In the short term, the bank said it expects prices to rise as a result of the trade conflict and supply disruptions. But it said it would “proceed carefully” and continue to assess “downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”
“Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war,” it added. “What it can and must do is maintain price stability for Canadians.”
© 2024 AFP
