The Bank of Canada lowered interest rates to 2.25 per cent on Wednesday, but cautioned that monetary policy can’t fix the structural economic damage caused by the U.S. trade war.
The central bank said it made the 25-basis-point cut as weakness ripples through the Canadian economy and with inflation expected to stay close to the bank’s two per cent target.
“For many months, we have been stressing that monetary policy cannot undo the damage caused by tariffs,” said Bank of Canada governor Tiff Macklem in his opening statement.
“Increased trade friction with the United States means our economy will work less efficiently, with higher costs and less income. Monetary policy can help the economy adjust as long as inflation is well-controlled, but it cannot restore the economy to its pre-tariff path.”
Macklem also indicated that if inflation evolves broadly in line with the bank’s current expectations — hovering around the two per cent target — it will hold rates at their current level.
However, if the outlook changes, “we are prepared to respond,” he added.
The central bank released its Monetary Policy Report alongside its interest rate announcement on Wednesday, warning that the trade conflict is “fundamentally reshaping” Canada’s economy.
