The Bank of Canada (BoC) cut interest rates for the sixth consecutive time, opting for a quarter-percentage point and knocking Canada’s key interest rate down to 3%.
Driving the news: This could be the last rate cut before the Trump administration rolls out some form of tariffs on Canadian goods, which it has threatened to do on Feb. 1. New tariffs, and Canada’s retaliation, would shift the BoC’s calculations going into the next rate decision.
Why it matters: Cutting rates stokes economic activity when the GDP needs some help to stay afloat. The BoC’s next decision in March (likely to be a time of historic uncertainty) is particularly important as the wrong move might exacerbate economic hardship for Canada.
- An all-out tariff war would lead to elevated prices for imports from the U.S. like food items. More rate cuts in addition to this could run the risk of reigniting inflation.
- However, U.S. tariffs will also weigh on Canadian economic growth. The BoC projects a blanket 25% tariff to lower Canada’s GDP by 2.4% in the first year.
And then there’s the loonie… If the U.S. Federal Reserve continues to hold rates steady, the contrast of more interest rate cuts by the BoC could weaken the Canadian dollar even further. In this scenario, Bank of America economists said the loonie could fall as low as 64.51 cents U.S.—QH