- Trade conflict would slow first-quarter GDP, bank said
- Conflict could disrupt recovery in the jobs market, it said
- Inflation is expected to go up to around 2.5% in March
- Chances of another rate cut in April are around 45%
OTTAWA, March 12 (Reuters) - The Bank of Canada trimmed its key policy rate by 25 basis points on Wednesday to 2.75% and warned of "a new crisis" as it tried to prepare the country's economy for the damage that President Donald Trump's tariffs could wreak.
The bank also said it would "proceed carefully with any further changes" to rates given the need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.
The cut marked the seventh consecutive time the central bank has eased monetary policy, shrinking the key rate by a total of 225 basis points in a space of nine months and making it one of the most aggressive central banks globally.
"We ended 2024 on a solid economic footing. But we're now facing a new crisis," Governor Tiff Macklem said in opening remarks to a press conference.
"Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe. The uncertainty alone is already causing harm," he said.
Trump's stop-start tariff policies and threats to a wide range of Canadian products have alarmed companies, shaken consumer confidence and hurt business investment.
He imposed a 25% tariff on all steel and aluminum products on Wednesday and Canada said it will impose C$29.8 billion ($20.68 billion) in retaliatory tariffs on the United States effective Thursday.
The bank said that a protracted tariff war would lead to poor GDP growth and high prices, a challenging mix that makes it tough to decide on whether to hike or cut rates.
The rate-setting Governing Council will focus on assessing the timing and strength of both the downward pressure on inflation from a weaker economy and the upward pressure from higher costs, Macklem said.
The trade conflict would slow first-quarter GDP and could possibly disrupt the recovery in the jobs market, he said, adding that the fear of the impact of tariffs on prices had already pushed up short-term inflation expectations.
Inflation is expected to be around 2.5% in March, up from 1.9% in January, as a short-term sales-tax break ends.
The Canadian dollar extended gains after the decision and was trading stronger by 0.20% to 1.4403 to the U.S. dollar, or 69.43 U.S. cents. Yields on two-year government bonds dropped by 0.8 basis points to 2.521%.
Currency markets are betting that the chances of another rate cut of 25 basis points at the bank's next announcement on April 16 are around 45%.
Some economists called the statement by the governor hawkish and said further rates could be dependent on how consumer prices react to the trade war.
"A rate cut in April will depend on medium- and longer-term inflation expectations remaining anchored," said Royce Mendes, head of macro strategy for Desjardins Group.
SPECIAL SURVEY
The United States is Canada's biggest trading partner and takes almost 75% of all Canadian exports.
A separate special bank survey of businesses and households conducted from late January until the end of February showed that many households were concerned about job security, especially in sectors exposed to U.S. trade.
The tariff threat has forced business to lower their sales outlook.
Some businesses are finding it hard to get credit, and a weaker currency has made imports expensive, the survey pointed out. This means that firms are pulling back their hiring and investment plans, it said.
The recent shift in consumer and business intentions is expected to translate into a marked slowing in domestic demand in the first quarter, Macklem said in his remarks.
"Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation," he said.
($1 = 1.4411 Canadian dollars)
Reporting by Promit Mukherjee and David Ljjunggren; Additional reporting by Fergal Smith, Nivedita Balu and Anna Mehler Paperny; Editing by Mark Porter
Source: Reuters