Bank of Canada Reduces Its Target Overnight Interest Rate Amid Uncertainty of US Tariffs

On Wednesday, Bank of Canada reduced its target for the overnight rate by 0.25% to 2.75%, with the Bank Rate at 3.00% and the deposit rate at 2.70%.

The Bank said that the Canadian economy entered 2025 in a solid position, with inflation close to the 2% target and robust GDP growth. However, heightened trade tensions and tariffs imposed by the US will likely slow the pace of economic activity and increase inflationary pressures in Canada. The economic outlook continues to be subject to more-than-usual uncertainty because of the rapidly evolving policy landscape.

While economic growth has come in stronger than expected, the pervasive uncertainty created by continuously changing US tariff threats is restraining consumers’ spending intentions and businesses’ plans to hire and invest. Against this background, and with inflation close to the 2% target, the Bank decided to reduce the policy rate by a further 25 basis points.

The Bank said that 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. The Bank will be carefully assessing the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs. It will also be closely monitoring inflation expectations. The Bank said it is committed to maintaining price stability for Canadians.