Published on: March 13, 2025
As expected by the markets, the Bank of Canada (BoC) announced a 25 basis point cut in its policy rate on Wednesday, bringing it to 2.75%. This is a seventh consecutive reduction by the central bank, which must now grapple with the potential impact of tariffs on economic growth and inflation.
In a press release, the BoC stated that despite a good start to 2025 for the Canadian economy, “The outlook continues to be subject to more-than-usual uncertainty because of the rapidly evolving policy landscape.”
Here are some of the observations made by the BdC following its decision on March 12:
• Growth in the first quarter of 2025 is expected to slow due to the trade conflict weighing on confidence and activity.
• The unemployment rate has decreased to 6.6%.
• Inflation remains close to the 2% target.
• Oil prices are trading below the assumptions in January Monetary Policy Report.
• There was no Monetary Policy Report at this meeting.
In its press release, the Bank stated that the Governing Council “will assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs,” hinting at a tug-of-war between growth and inflation. However, this type of trade conflict does not really affect the correlation between growth and inflation if Canada does not impose tariffs on US exports with a blanket strategy like the US administration, but rather targets more specific industries.
The BoC is fully aware that Canada is a small open economy with an export strategy that relies almost entirely on a single trading partner. When this major trading partner shifts from being a friend to being a foe, we can expect a generalized recession marked by considerable oversupply and a rise in the unemployment rate, which would considerably slow down the current wage growth due to increased job insecurity.
As the Governing Council has also pointed out, the shock described above would be permanent. This means that the ratio of exports to GDP would decline permanently. In the meantime, we would witness a transition phase in the labour market, with export-related employment-intensive industries giving way to domestic activities.
In the past, Canadian recessions generally resulted from a US recession. In this case, the nature of the shock makes the economic environment between the two countries completely atypical. An isolated Canadian recession would mean a very large decoupling between monetary policies.