Ottawa (AFP) – Canada’s central bank held its key lending rate at 2.75 percent on Wednesday, as the major US trading partner confronts economic uncertainty two days before President Donald Trump’s latest tariff deadline. Canada remains uniquely vulnerable to Trump’s trade war given the deep, broad ties between the neighboring economies. Trump’s threat to hike tariffs to 35 percent on certain goods if no new trade deal is reached by Friday could wreak further havoc across a Canadian economy already strained by US protectionism.
“Let’s hope there’s an agreement between Canada and the United States. Let’s hope it’s a good agreement,” Bank of Canada Governor Tiff Macklem told reporters after the rate announcement. He conceded, however, that “there is a sense that US policy may well remain unpredictable.” “There’s a sense that…it’s going to be hard to restore that trust,” in the United States as an economic partner, he added. A statement from the bank said that “while some elements of US trade policy have started to become more concrete in recent weeks, trade negotiations are fluid (and) threats of new sectoral tariffs continue.”
Canada was the first G7 country to begin cutting rates last year, following several hikes to tame pandemic-fuelled inflation. But Wednesday marked the bank’s third consecutive pause, caution largely driven by Trump’s policies. “It’s hard to be as forward-looking as usual when you’ve got an unusual amount of uncertainty,” Macklem said. A central bank forecast released Wednesday outlined a scenario where the impact of new US tariffs could be muted, if new levies do not apply to goods compliant with an existing trade deal Trump signed — and praised — during his first term. The bank said 100 percent of energy exports and 95 percent of all other exports — excluding auto parts — could be compliant with the United States-Mexico-Canada Agreement (USMCA).
Drew Fagan, a tariff policy expert at Toronto’s Munk School of Global Affairs, told AFP that if exemptions for USMCA compliant goods hold, Canada does not necessarily need a deal urgently. He cited research showing the average tariff rate on Canadian goods entering the United States is currently two percent. That’s “a big increase” compared to the 0.1 percent before Trump took office, but highlights that lots of Canadian goods are still crossing the border tariff-free. If Trump decides to ditch the USMCA entirely, “then all bets are off,” Fagan said.
Targeted sector tariffs are expected to remain, bringing further pain for Canadian auto workers who have seen layoffs and shift cuts triggered by the president’s push to have more cars made entirely in the United States. Canada’s auto plants are highly integrated with US production sites, with parts crossing the border multiple times during assembly. Canadian Prime Minister Mark Carney has in recent days tried to temper expectations, saying a tariff-free deal with Washington may not be possible. The prime minister, who previously led the Bank of Canada and the Bank of England, has also said a recently agreed US-EU framework is not a template for Canada. “There are differences. One is geographic proximity,” he said this week.
The Bank of Canada did not rule out rate cuts later this year to help borrowers. “The Bank appears to be getting a little more comfortable with the notion that the Canadian economy will need the support from further interest rate cuts,” CIBC economist Andrew Grantham said in a statement, reacting to Wednesday’s announcement. But Macklem stressed the bank would act if it sees tariffs driving inflation. “We are going to make sure that a tariff problem does not become an inflation problem,” he told reporters.
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