Bank of Canada Governor Tiff Macklem has issued a warning that a tariff war with the United States could have significant negative effects on Canada’s economic activity. In response to this concern, the Bank of Canada has cut its key policy rate by 25 basis points to 3 percent, marking the sixth consecutive rate reduction.
A potential 25 percent tariff on all imports from Canada by the US President Donald Trump has raised fears of economic damage in Canada, as 75 percent of all Canadian exports go to the US. If Canada were to retaliate with a similar tariff, it could lead to a significant impact on the country’s growth over the next two years.
The Canadian dollar dipped following the rate cut, and there is speculation in money markets of a further rate reduction in the near future. The Bank of Canada faces a challenge in terms of balancing the need for higher rates due to potential inflation caused by tariffs, while also stimulating growth through lower rates.
Despite the economic challenges, the Bank of Canada remains committed to supporting the economy with its monetary policies. The bank also announced the end of its quantitative tightening program in March.
The bank revised down its economic growth forecasts for 2025 and 2026, while raising its inflation expectations. The Canadian economy has been struggling on a per-capita basis, and with reductions in immigration expected, population growth may also be impacted.
Overall, the Bank of Canada is closely monitoring the situation and stands ready to take further action to support the economy in the face of potential trade conflicts and other challenges.
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