admin The Bank of Canada’s interest rate announcement on Wednesday comes amid growing uncertainty, driven by an escalating trade war with the United States.
Most economists anticipate the central bank will introduce another quarter-point rate cut while assessing how long the dispute with Canada’s largest trading partner will persist.
The Bank of Canada faces a challenging task: formulating monetary policy at a time when inflation remains stubbornly high and economic activity is strengthening, yet the risk of a sharp downturn due to U.S. tariffs looms large.
“It’s an extremely difficult position for the Bank of Canada,” said Randall Bartlett, deputy chief economist at Desjardins Group, in an interview.
Despite U.S. President Donald Trump imposing sweeping tariffs on Canadian goods on 4 March, the exact scope of these measures has shifted repeatedly due to pauses and amendments in the days since.
“Who knows what this will look like from day to day? It’s anyone’s guess,” Bartlett said.
A prolonged trade war with the U.S. would have severe repercussions for the Canadian economy.
Bartlett warned that inflation is likely to rise in the near term due to trade disruptions, and job losses could quickly mount in the hardest-hit sectors if those industries do not receive tariff relief.
Desjardins projects that Canada could enter a recession by mid-year if significant tariffs remain in place.
This outlook marks a stark contrast to the economic trajectory Canada had been on entering 2025.
Late last year, there were signs that previous interest rate cuts were beginning to take effect, as Canadian consumers drove a surge in retail activity to close out 2024. Absent major disruptions, 2025 had appeared set for economic recovery.
Following six consecutive cuts, which brought the Bank of Canada’s interest rate down to 3 per cent, Bartlett said the “economic tea leaves” suggested the central bank should pause its easing cycle to assess inflation and growth trends.
“But then, of course, we were hit with the tariff shock on 4 March, and all bets are off regarding what that means for the Bank of Canada,” Bartlett said.
As of Friday, financial markets were largely expecting a quarter-point rate cut, according to LSEG Data & Analytics. Before the tariffs were implemented, market odds of a rate hold or cut were essentially even.
Bank of Canada Governor Tiff Macklem cautioned in a speech on 21 February that if the tariffs are broad and prolonged, “there won’t be a bounce back” in the Canadian economy as there was following the COVID-19 recovery. Instead, he warned, it would be a “structural change.”
Macklem also emphasised that the central bank cannot simultaneously counteract weak economic growth and rising inflation caused by a tariff shock. He stated that the Bank of Canada’s policy rate would be used to “smooth” the economic impact while keeping inflation expectations anchored at its 2 per cent target.
Andrew Grantham, senior economist at CIBC Capital Markets, noted in a client report on Friday that while rate cuts cannot “solve the tariff issue,” they can help ease the economic transition through this period of uncertainty.
CIBC expects the Bank of Canada to lower its benchmark rate by a quarter-point to 2.75 per cent on Wednesday, with further cuts possible this year if trade instability continues.
Bartlett also anticipates a 25-basis-point cut to provide some support to the Canadian economy but believes the central bank will avoid more aggressive action until there is greater clarity on the tariff situation.
He cautioned that the Bank of Canada’s ability to lower rates further is limited, partly due to the weakening Canadian dollar.
The loonie is vulnerable not only to trade war pressures but also to the widening gap between interest rates in Canada and the U.S., Bartlett said.
If the Bank of Canada reduces rates too aggressively, the loonie could depreciate further, leading to higher inflation on imported goods such as food from the U.S.
Magazine 
