Bank of Canada cuts interest rate by 1/4 point .

The Bank of Canada cut its key interest rate by a quarter-percentage-point on Wednesday and warned of an impending economic downturn as the trade war with the United States rattles consumer and business confidence.

The widely expected move lowers the benchmark policy rate to 2.75 per cent. This is the bank’s seventh consecutive cut since it began easing monetary policy last summer as pandemic-era inflation faded.

Live updates: Bank of Canada cuts interest rate by quarter-point to 2.75%

“We ended 2024 on a solid economic footing. But we’re facing a new crisis,” Governor Tiff Macklem said in a press conference after the rate announcement. “Depending on the extent and duration of new US tariffs, the economic impact could be severe. The uncertainty alone is already causing harm.”

Mr. Macklem said the bank lowered interest rates to help cushion the impact of trade volatility. However, he said the bank would “proceed carefully with any further changes to our policy rate” given the challenges of balancing the downside risk to economic activity with the upside risk to inflation caused by tariffs.

Canada’s trade-dependent economy is facing a major shock with U.S. President Donald Trumpthreatening decades of North American economic integration. Since returning to the White House in January, Mr. Trump has imposed tariffs on most Canadian goods, partially lifted them, then threatened more.

On Wednesday, he imposed 25 per cent tariffs on steel and aluminum imports – a move that will have an outsized impact on Canada, which is America’s largest foreign supplier of both metals.

Aggressive and erratic U.S. trade policy is weighing on Canadians, Mr. Macklem said. Consumers are becoming worried about job security and paring back spending plans. Businesses are implementing hiring freezes and putting investment plans on hold.

“The recent shift in consumer and business intentions is expected to translate into a marked slowing in domestic demand in the first quarter of this year,” Mr. Macklem said. “If household and business spending intentions remain restrained, the combination of weaker exports and soft domestic demand would weigh further on economic activity in the second quarter.”

Mr. Macklem avoided using the term “recession,” but has previously indicated that a prolonged trade war with the U.S., where 25 per cent tariffs are imposed and Canada retaliates, could wipe out economic growth over the next two years. The bank did not publish a new forecast on Wednesday.

Mr. Macklem’s comments about needing to “proceed carefully” in adjusting monetary policy suggests the bank won’t slash interest rates as rapidly or as much as in past crises, such as the COVID-19 recession and the 2008-2009 financial crisis.

A trade war is what economists call a stagflation shock:

Tariffs slow down economic activity, but they also raise consumer prices, as retaliatory levies and currency depreciation raise the cost of imported goods. That forces an inflation-targeting central bank, like the Bank of Canada, to choose between easing monetary policy to support the economy and tightening it to head off inflation.

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,” Mr. Macklem said. “The focus of Governing Council will be on assessing the timing and strength of both the downward pressure on inflation from a weaker economy and the upward pressure from higher costs.”

Inflation has been fairly low and stable since last summer, hovering around the bank’s 2-per-cent target, and coming in at 1.9 per cent in January. However, that number has been flattered by the federal GST-holiday, in place from mid-December to mid-February, and some core inflation measures have been ticking higher. The bank expects inflation to increase to around 2.5 per cent in March as the GST tax break ends, the bank said on Wednesday.

A special survey of businesses and consumers, which the bank conducted last month, picked up some worrying signals about the direction of inflation during a trade war. Short-term consumer inflation expectations have risen, while businesses are reporting a jump in input costs, which they intend to pass along to customers.

“Around half of businesses surveyed plan to increase their prices if tariffs are imposed on their inputs and products. Of those planning price increases, around three-quarters expect to pass on more than half of the tariff-related cost increases to their customers,” the bank survey report said.

On a positive note, the Canadian economy is entering the trade war with the U.S. on a better-than-expected footing. The Canadian economy grew at an annualized rate of 2.6 per cent in the fourth quarter of last year, well ahead of Bay Street and Bank of Canada estimates. If it wasn’t for U.S. tariffs, many economists believe the central bank would have paused rate cuts by now.