Bank of Canada cuts interest rate by quarter point

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The Bank of Canada cut its key interest rate by 25 basis points on Wednesday, citing trade uncertainty with the U.S. for the decision.

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“In recent months, the pervasive uncertainty created by continuously changing U.S. tariff threats has shaken business and consumer confidence,” said Bank of Canada governor Tiff Macklem, during opening remarks in Ottawa. “This is restraining household spending intentions and businesses’ plans to hire and invest.”

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The decision to cut for the seventh consecutive time on Wednesday was largely expected by markets and economists and brings the central bank’s overnight rate down to 2.75 per cent, in the middle of the bank’s estimated neutral range.

“Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe,” said Macklem.

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The central bank estimates a protracted trade war could knock three per cent off Canada’s growth over the next two years. The bank also estimates investment in Canada could decline by 12 per cent and exports could decrease by 8.5 per cent after the first year.

Macklem added that the “uncertainty alone is already causing harm.”

The central bank also published the results of a survey with businesses and consumers on Wednesday, which show how business and household spending sentiment has shifted.

Around 72 per cent of consumers expect costs to go up as a result of tariffs and 47 per cent of businesses think the same, according to a survey conducted between Jan. 29 and Feb. 28.

Around 48 per cent of businesses surveyed plan to reduce their investment plans and 40 per cent plan to pull back on hiring, with just two per cent of businesses saying they will increase investment.

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“Our surveys also suggest business intentions to raise prices have increased as they cope with higher costs related to both uncertainty and tariffs,” said Macklem. “At the same time, inflation expectations have moved up as Canadians brace for the possibility of higher prices.”

The bank expects inflation to rise to 2.5 per cent in March, after the end of the GST/HST federal tax break.

Macklem said the impact of tariffs on inflation will be more difficult to assess and will include a number of factors such as a weakening Canadian dollar, the cost of retaliatory tariffs and a pullback in household spending and business confidence.

The bank said it will continue to monitor inflation expectations closely.

“Monetary policy cannot offset the impacts of a trade war,” said Macklem. “The focus of Governing Council will be on assessing the timing and strength of both the downward pressure on inflation from a weaker economy and the upward pressure from higher prices.”

• Email: jgowling@postmedia.com

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