Rate cut decisions just got exciting again. Well, as exciting as a rate cut decision can be.
What happened: The Bank of Canada (BoC) lowered the nation’s benchmark interest rate by a quarter point, cutting it to 2.75%. While this was the central bank’s seventh straight rate cut, the context and reasoning behind it are different from those of the six that came before.
Big picture: Previously, the BoC cut rates in response to easing inflation and the increased likelihood of a soft landing. This time around, it’s doing so as a safeguard against the economic shockwaves that are already rippling from the Canada-U.S. trade war.
- BoC surveys found that consumers and businesses plan to spend less; a KPMG survey showed that some export-oriented companies are already laying off workers.
Why it matters: The trade war has the BoC between a rock and a hard place. While tariffs will hurt growth and employment — necessitating lower rates to help keep money flowing through the economy — they will also lead to higher prices, which could reignite inflation.
- If it weren’t for the trade war, it’s likely the BoC would have paused cuts, as Canada’s GDP surpassed expectations last quarter and inflation unexpectedly rose in January.
Bottom line: BoC Governor Tiff Macklem stressed in his remarks that interest rates aren’t a very useful tool for fighting tariff impacts, but what they can still do is combat inflation.—QH