Bank of Canada Cuts Rates 25-Basis Points, Warns Of Trade War Impacts

As expected, the Bank of Canada has again lowered interest rates as inflation cools and signs point to a slowing economy.Canada's central bank lowered interest rates by 25-basis points, taking its benchmark overnight rate down to 3%. This is the sixth consecutive rate cut by the Bank of Canada since last summer. Interest rates have now been lowered a total of 200-basis points.The latest interest rate reduction comes as annualized inflation in Canada is at 1.8%, below the central bank's 2% target. Inflation has steadily declined from a peak of 8.1% in June 2022.The latest rate cut also comes amid growing evidence that the Canadian economy is slowing. The rate reduction was widely expected by economists and priced into financial markets. Still, the rate cut puts Canada on a divergent monetary policy path from the U.S., where the Federal Reserve is widely expected to hold interest rates steady at the conclusion of its latest policy meeting later today (Jan. 29). In announcing its interest rate decision, the Bank of Canada also forecast potential impacts should the U.S. follow through on its threats to impose tariffs on Canadian imports of up to 25%. The central bank warned that a protracted trade war between the two countries would hurt economic activity in Canada and spark a rise in inflation.One model presented shows a scenario where 25% tariffs applied by both Canada and the U.S. would result in a 2.5% drop in this country’s gross domestic product (GDP) in the first year and a 1.5% decline in the second year. That situation would result in Canada's economy falling into a recession. U.S. tariffs are also likely to further depreciate the Canadian dollar, said the Bank of Canada at a news conference held in Ottawa. The Bank of Canada’s next decision on interest rates is scheduled to take place on March 12.