Bank of Canada Lowers Policy Rate Again, Reiterates Uncertain Outlook in Wake of Trade War

The Bank of Canada reduced its target for the overnight lending rate by 25 basis points from 3% to 2.75%. Announced on Wednesday, March 12, 2025, the cut was widely expected by financial markets in the lead-up to the decision, marking the seventh rate reduction since the beginning of the rate-cut cycle and bringing rates down 2.25% from where they stood in April 2024.

The Canadian economy had been on solid footing at the start of the year, but the Bank noted that “heightened trade tensions and tariffs imposed by the United States will likely slow the pace of economic activity and increase inflationary pressures in Canada.” The Bank also noted, “recent surveys suggest a sharp drop in consumer confidence and a slowdown in business spending as companies postpone or cancel investments.”

The same message was echoed for the jobs market. Employment growth had shown recent signs of strengthening but with the trade war escalating, including today’s implementation of the 25% tariffs on Canadian steel and aluminium exports to the U.S., the Bank cautioned “there are warning signs that heightened trade tensions could disrupt the recovery in the jobs market.”

The Bank expects inflation to increase to about 2.5% in March as the GST/HST break ends. However, it stated “monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation.” This reiterates the Bank’s primary mandate of inflation targeting and makes clear its policy rate as a tool will be unable to aid with economic shocks arising from the tariffs.

Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation.” 

The Bank of Canada 

The Bank will also have to manage a delicate balance on the inflation front, concluding that its “Governing Council will be carefully assessing the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”

The Bank of Canada will make its next scheduled interest rate announcement on April 16 and publish its full outlook for the economy and inflation in its next Monetary Policy Report on the same date.