Bank of Canada cuts rates again, but warns tariffs will ramp up inflation

On Wednesday, the Canadian central bank reduced its target for the overnight rate by 25 basis points to 2.75%, as expected by economists.

The BoC has been steadily loosening monetary policy since rates peaked at 5% between July 2023 and June 2024, cutting rates by a total of 225bp in just nine months.

In a statement, policymakers said the Canadian economy had entered 2025 in a "solid position" with robust GDP growth and inflation close to the 2% target.

Canada's economy expanded at a 2.6% clip in the fourth quarter following 2.2% growth in the third, while consumer price inflation in January was 1.9%, though this is expected to have risen to around 2.5% in March.

However, tariffs imposed on Canadian imports into the US will likely "slow the pace of economic activity and increase inflationary pressures on Canada", the Bank said. "More-than-usual uncertainty" was to blame for a recent drop in consumer confidence and slowdown in business spending.

"While economic growth has come in stronger than expected, the pervasive uncertainty created by continuously changing US tariff threats is restraining consumers’ spending intentions and businesses’ plans to hire and invest. Against this background, and with inflation close to the 2% target, Governing Council decided to reduce the policy rate by a further 25 basis points," the BoC said.

"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."