The Bank of Canada has once again lowered interest rates as inflation continues to decline and signs point to a slowing domestic economy.
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Canada’s central bank lowered interest rates by 25-basis points, taking its trendsetting overnight rate down to 3%. It is the sixth consecutive rate cut by the Bank of Canada since June of last year. Interest rates in the country have now been lowered a total of 200-basis points as annualized inflation in the country is currently at 1.8%, below the central bank’s 2% target.
The latest rate cut comes amid mounting evidence that the Canadian economy is slowing down. Inflation has also moved lower in recent months as the Canadian economy slows and energy prices, including gas at the pumps, retreats. Inflation in Canada has steadily declined from a peak of 8.1% in June 2022. The latest interest rate reduction of 25-basis points was widely expected by economists and markets.
The rate cut in Canada puts the country 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 policy meeting on Jan. 29.
U.S. Tariff Threat
In announcing its latest 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 neighboring countries would hurt economic activity in Canada and put upward pressure on inflation.
One model presented by the central bank shows a scenario where 25% tariffs applied by both Canada and the U.S. would result in a 2.5% drop in Canadian 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.
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