Bank of Canada cuts interest rate by half a percentage point, highlights risk of Trump’s tariffs
TORONTO — Canada’s central bank cut its key interest rate by half a percentage point on Wednesday, calling newly-elected President Donald Trump’s threat to impose sweeping new rates on Canada “a major source of new uncertainty.”
The Bank of Canada’s decision marked the fifth consecutive cut since June and brings the central bank’s policy rate down to 3.25%. Forecasters widely expected a big rate cut after the November labor survey showed the unemployment rate rose to 6.8%.
Governor Tiff Macklem said in his prepared statement that the central bank has opted for two major interest rate cuts in a row because inflation and economic growth no longer need to be curbed. With inflation back at the 2% target, the central bank is now focusing on keeping it there.
But the central bank noted a number of risks to the economy, including Trump’s threat of 25% tariffs.
“The possibility that the new U.S. administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook,” the bank statement said.
Trump has threatened to impose a 25% tax on all products enter the US from Canada and Mexico unless they stem the flow of migrants and drugs.
“We have underlined that the threat of new tariffs on Canadian exports, especially at the proposed level, is a major source of new uncertainty,” Macklem said at a news conference. “But the reality is that we don’t know whether these tariffs will be implemented.
“We don’t know if waivers will be agreed on some parts, we don’t know at what level, we don’t know if Canada will retaliate.”
He said all of these factors are important, adding that it is likely already having some impact.
“There is no doubt that if rates were to be increased at the levels suggested, it would be highly disruptive to the Canadian economy,” Macklem said. “It would also be very disruptive to the US economy. Hopefully that won’t happen, but we have highlighted it as a risk.”
Canadian Prime Minister Justin Trudeau said there would be tariffs “absolutely devastating” for the Canadian economy, but it would also mean real hardship for Americans.
Economists say companies have little choice but to pass on the extra costs. increase prices dramatically for food, clothing, cars, alcohol and other goods.
The Produce Distributors Association, a Washington-based trade group, has said tariffs will raise prices for fresh fruits and vegetables and hurt U.S. farmers if the countries retaliate.
Trudeau said this week that the government is still considering “the right ways” to respond, pointing to Canada imposing tariffs on the U.S. in 2018 as a tit-for-tat response to new taxes on Canadian steel and aluminum .
About 60% of U.S. crude oil imports come from Canada, as do 85% of U.S. electricity imports.
Canada is also the largest foreign supplier of steel, aluminum and uranium to the US and has 34 critical minerals and metals that the Pentagon covets and invests in for national security.
Nearly $3.6 billion Canadian (US$2.7 billion) worth of goods and services cross the border every day. Canada is the main export destination for 36 US states.