- BoC cuts rates by 25 basis points to 3% as expected
- 2025 GDP seen at 1.8%, revised from 2.1% projected earlier
- Lifted forecast for inflation to 2.3% from 2.2% in 2025
- Markets see 50% chance of 25 bps rate cut in March
OTTAWA, Jan 29 (Reuters) - The Bank of Canada on Wednesday trimmed its key policy rate by 25 basis points to 3%, cut growth forecasts and warned Canadians that a tariff war triggered by the United States could cause major economic damage.
U.S. President Donald Trump is promising to impose a 25% tariff on all imports from Canada on Saturday. Canada sends 75% of all goods and services exports to the United States.
"A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada," Governor Tiff Macklem said in opening remarks to a press conference. The prospect of such a war is clouding the economic outlook.
If Canada and other nations slapped a retaliatory 25% tariff on the United States, this could cut Canadian growth by 2.5 percentage points in the first year and another 1.5 percentage points in the second year, the bank said, noting that this was not a forecast but a hypothetical scenario.
Wednesday's cut marked the sixth time in a row that the bank has reduced borrowing costs. Inflation has consistently stayed around the mid-point of the bank's 1-3% target range but economic growth is still sluggish.
"With inflation around 2% and the economy in excess supply, Governing Council decided to reduce the policy rate a further 25 basis points to 3%," the bank said in a statement.
The Canadian dollar was down 0.3% at 1.4437 against the U.S. dollar after the decision.
Money markets see an over 43% chance of another 25-basis-point cut at the BoC's next monetary policy decision announcement on Mar. 12.
"The Bank of Canada would be in a tough situation but our view is that they would become more aggressive in terms of rate cuts if that's (U.S. tariffs) what we're faced with," said Doug Porter, chief economist at BMO Capital Markets.
The bank's challenge is that U.S. tariffs might both drive up inflation - in theory prompting the need for higher rates - and also cut growth, which could on paper mean more stimulus in the form of lower rates.
"With a single tool - our policy interest rate - we can't lean against weaker output and higher inflation at the same time," Macklem said. The bank though could help the economy adjust, especially given that inflation is low, he said.
The bank also announced that its quantitative tightening program, designed to drain the excess liquidity it pumped into the economy during the pandemic, would end in March.
The BoC, which has been among the most aggressive top central banks in cutting rates, trimmed the country's economic growth outlook to 1.8% in 2025 from the 2.1% predicted in October. The economy will grow by 1.8% in 2026, down from growth of 2.3% forecast earlier.
The central bank lifted its forecast for inflation to 2.3% from 2.2% in 2025 and to 2.1% from 2.0% for 2026. The projections do not take into account possible U.S. tariffs.
Canada's economy has been shrinking on a per-capita basis for six consecutive quarters and most of the growth observed has been supported by an increase in population.
With the federal government's new curbs on immigration, Canada is likely to see a population decline of 0.2% in both 2025 and 2026.
Reporting by Promit Mukherjee and David Ljunggren in Ottawa; Additional reporting by Nivedita Balu and Fergal Smith in Toronto; Editing by Mark Porter
Source: Reuters