On Wednesday morning, the Bank of Canada (BoC) announced an interest rate cut of 25 basis points for their March decision — the second of 2025 — bringing the policy rate down to a 2.75%. This marks the seventh consecutive cut delivered by the central bank since June 2024, and follows a 25-bps cut in late January.
Wednesday’s quarter-point cut comes as a trade war with the US develops. Last week, US President Donald Trump imposed a 25% tariff on all Canadian imports, as well as a 10% tariff on energy products and critical minerals, only to partially walk back on it later in the week, suspending levies for goods that are CUSMA/USMCA-compliant until April 2. A separate 25% tariff on international steel and aluminum imports went into effect as of this morning.
In a statement, the BoC noted that “the Canadian economy entered 2025 in a solid position” with inflation at 1.9% in January, and GDP up by 2.6% in the fourth quarter.
“Past cuts to interest rates have boosted economic activity, particularly consumption and housing. However, economic growth in the first quarter of 2025 will likely slow as the intensifying trade conflict weighs on sentiment and activity,” the Bank said. “Recent surveys suggest a sharp drop in consumer confidence and a slowdown in business spending as companies postpone or cancel investments. The negative impact of slowing domestic demand has been partially offset by a surge in exports in advance of tariffs being imposed.”
“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 statement went on to say.
Given the revolving door of tariffs and tariff threats, markets were pricing a quarter-point interest rate cut leading up to today’s BoC meeting, and economists with Canada’s ‘Big Five’ banks were leaning that way as well.
In a weekly commentary published Friday, CIBC Economist Avery Shenfeld warned that without a “truce” between Canada and the US in April, GDP, which has been presenting strong over the past few quarters, is expected to shrink in Q2-2024, while unemployment rises to “new cyclical highs” by spring.
“Fiscal measures due to be announced shortly could help cushion that blow, but larger programs will likely have to wait until May at the earliest, given the upcoming election,” Shenfeld said. “The Bank’s job is to keep an eye further out on the horizon than a month or two. It can’t reopen a shuttered factory with a few rate cuts, but it can support domestic demand as an offset. Indeed, the Governor, while noting that a structural hit to the economy isn’t something he can magically fix, did say that the Bank can help smooth the adjustment process. With only one tool at his disposal to “help”, that suggests that he’s on board with some further interest rate relief.”
In the longer-term, BMO economists have revised their forecast (as of March 4) to reflect quarter-point cuts at each of the BoC’s next four meetings — today’s included — which would bring the policy rate down to 2% by the July 30th announcement. Previously, BMO was forecasting that the central bank would lower the policy rate two more times, in April and July, which would land the policy rate at 2.50%.
The next interest rate decision is scheduled for Wednesday, April 16, 2025, and the BoC will also be releasing a Monetary Policy Report at that time. A full 2025 schedule can be found here.
