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Bank of Canada cuts interest rate, warns it can do little to offset U.S. tariff impact

Canada’s central bank lowered its interest rate by 25 basis points to three per cent on Wednesday, as the Bank of Canada governor warned there was little he could do to negate the economic impact of U.S tariffs imposed on Canadian imports.

“Monetary policy cannot offset the economic consequences of a protracted trade conflict,” Bank of Canada governor Tiff Macklem told reporters

The reality is the economy is going to work less efficiently. Canada’s going to produce less. It’s going to earn less. Monetary policy can’t change that.”

U.S. President Donald Trump has threatened to impose a 25 per cent tariff on all Canadian imports, a move that could come as early as Feb. 1.

While economic policies can’t provide a complete buffer from the consequences of a long-lasting trade war, they can hopefully help the economy adjust, Macklem said.

“With inflation back around the two-per-cent target, we are better positioned to be a source of economic stability,” he said. “However, with a single instrument — our policy interest rate — we can’t lean against weaker output and higher inflation at the same time.”

Ongoing uncertainty

He noted there’s still much uncertainty about new tariffs, including how long they will last, their scope or the retaliatory measures.

“Even when we know more about what is going to happen, it will still be difficult to be precise about the economic impacts because we have little experience with tariffs of the magnitude being proposed,” he said.

But he said a long-lasting and broad-based trade conflict would badly hurt economic activity in Canada, with the higher cost of imported goods putting direct upward pressure on inflation.

The rate cut marks the sixth consecutive reduction since June but a slowdown from the central bank’s two previous heftier cuts. It slashed its key rate by half a percentage point in October and December as inflation hovered at or below its two per cent target.

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