The Bank of Canada has cut its key interest rate by 25 basis points to 2.75%. This move comes as the central bank aims to cushion the Canadian economy from the impact of U.S. tariffs. Governor Tiff Macklem and the Bank of Canada had considered leaving rates unchanged.
However, they ultimately decided that a rate cut was necessary to support the economy during this challenging period. U.S. President Donald Trump’s inconsistent policies on tariffs have created uncertainty among businesses and households. This has led to a drop in investment and spending.
The possibility of Canadian retaliation has further increased unpredictability. Tony Stillo, director at Oxford Economics, said, “The bank governor will err on the side of supporting the economy during what could be a downtrend from the tariffs.”
Currency markets are predicting a nearly 95% likelihood of a 25-basis-point cut. 20 out of 23 economists polled by Reuters anticipated this reduction.
Canada’s economy had begun to stabilize after several sluggish quarters.
bank reduces interest rate by 25 points
Fourth-quarter GDP surpassed forecasts, posting an annualized growth of 2.6%.
Inflation remained below 2% and unemployment fell. “A strong fourth quarter gives us a little bit of an insurance policy against these impending tariffs,” said Andrew DiCapua, principal economist at the Canadian Chamber of Commerce. However, DiCapua cautioned that it might not be enough to counteract a significant blow from tariffs.
He suggested that the central bank would need to bring interest rates closer to a neutral level soon. Analysts, including those from Citi, predict that the Bank of Canada may continue to cut rates until July this year. The current environment has sparked debates on the benefits of variable versus fixed-rate mortgages.
The ongoing tariffs, including those on steel and aluminum, have seen retaliatory measures from both Canada and the European Union. Canada’s foreign ministers have convened in Quebec to address the implications of U.S. economic policies. The Bank of Canada’s rate cut is part of broader efforts to blunt the impact of these international economic pressures on the Canadian economy.
The coming months will be critical in determining whether these measures will be sufficient to navigate through the complexities of current global trade dynamics.
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