The Bank of Canada has announced a reduction in the policy interest rate by 25 basis points, setting it at 2.75%. This decision comes amidst ongoing economic uncertainties due to fluctuating US tariff threats, which have impacted both business and consumer confidence.
Governor Carolyn Rogers highlighted that while the Canadian economy concluded 2024 on a positive note with inflation close to the 2% target, recent developments necessitated further action. "Today, we lowered the policy interest rate by 25 basis points, bringing it to 2.75%," she stated.
The report indicates that previous interest rate cuts had spurred household spending and economic growth, with GDP rising by 2.6% in the fourth quarter of last year. However, job growth has recently stalled after an increase in employment late last year.
Inflation has been stable around the target, but concerns are mounting due to potential trade conflicts with the United States. "Looking ahead, the trade conflict with the United States can be expected to weigh on economic activity," Rogers explained.
New survey data reveal growing apprehensions among Canadians about job security and financial health due to trade tensions. Businesses are also revising their sales forecasts downward and facing increased costs for imported goods because of a weaker Canadian dollar.
Despite these challenges, exports and imports are projected to rise in response to preemptive stockpiling before tariffs take effect. However, this could lead to future weaknesses if spending remains subdued.
Rogers emphasized that while monetary policy cannot fully counteract a trade war's effects, it is crucial for managing inflation expectations: "Monetary policy cannot offset the impacts of a trade war."
The Bank of Canada remains committed to maintaining price stability and will closely monitor inflation trends as they develop.