‘Pervasive uncertainty’ caused by trade war prompts Bank of Canada to drop overnight lending rate to 2.75%- The 25 basis point cut marks the seventh consecutive time Canada’s central bank has dropped rates

On March 12th, the Bank of Canada announced that it had lowered the target for the overnight lending rate by 25 basis points to 2.75%. This marks the seventh consecutive decrease to rates since June 2024. 

In its announcement, the Bank acknowledged that the Canadian economy had started the year on good footing. Now, with a trade war underway with the United States, the country is expected to see slower economic activity and increasing inflationary pressures in the months ahead, justifying the central bank’s decision to reduce its policy rate yet again. 

“[In recent] months, the pervasive uncertainty created by continuously changing US tariff threats has shaken business and consumer confidence. This is restraining household spending intentions and businesses’ plans to hire and invest. Against this backdrop, and with inflation near the 2% target, [the] Governing Council decided to reduce the policy rate a further 25 basis points,” said Tiff Macklem, Governor of the Bank of Canada, in a press conference with reporters following the announcement.

“Looking ahead, the trade conflict with the United States can be expected to weigh on economic activity, while also increasing prices and inflation. Governing Council will proceed carefully with any further changes to our policy rate given the need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.”

In January, Canada’s Consumer Price Index (CPI) rose 1.9% on a year-over-year basis, a slight increase from 1.8% in December. Higher gasoline and energy prices contributed to the modest uptick to the inflation rate, which remains under the Bank’s 2% inflation target. Inflation is expected to increase to 2.5% in March as relief from the GST/HST tax break subsides.