Bank of Canada Cuts Rate to 2.75% as Trade War Rattles Economy. But What Does This Mean?

Bank of Canada cuts key rate to 2.75% as trade war rattles economy

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.

“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.

WHAT DOES ALL THIS MEAN??

Here’s the key breakdown of what this means:

1. Interest rate cut:  

   The Bank of Canada lowered its key interest rate from 3% to 2.75%. This makes borrowing cheaper for businesses and consumers, which could stimulate spending and investment.

2. Why they cut rates:  

   - The Canadian economy is under pressure because of a trade war with the United States.  

   - Higher U.S. tariffs on Canadian goods are hurting business confidence and could lead to slower growth and job losses.  

   - The rate cut is meant to support the economy by making it easier and cheaper to borrow money, which could help businesses and consumers weather the downturn.  

3. Potential risks:  

   - While cutting rates might help boost the economy, it could also fuel inflation if it causes too much demand.  

   - The Bank of Canada is warning that future rate cuts will be handled carefully to avoid triggering inflation while still supporting the economy.  

4. What it means for real estate:

   - Lower rates usually lead to cheaper mortgages and increased affordability, which could boost home sales and push up home prices.  

   - However, economic uncertainty from the trade war could offset some of this benefit if consumer confidence drops or people become more cautious about big purchases like homes.  

In short: The Bank of Canada is trying to soften the blow from the trade war by cutting rates, but the long-term impact depends on how severe and prolonged the trade tensions with the U.S. become.