Interest reduction in Canada: Economy in danger from the US Customs War!

Interest reduction in Canada: Economy in danger from the US Customs War!

The Bank of Canada (BOC) reduced its key interest rate by 25 basis points to 3 percent on January 29, 2025. This decision marks the sixth interest rate reduction in a row and takes place in the middle of growing concerns about possible trade conflicts with the USA. BOC-GOFRENER TIFF MACKLEM warned that an escalation of the tariff conflicts, in particular through the announcement of US President Donald Trump, could result in 25 percent tariffs to all imports from Canada.

The BOC has reduced its growth forecasts, and a hypothetical punitive tariff from 25 percent to Canadian exports could push growth by 2.5 percentage points in the first year and 1.5 percentage points in the second year. This is particularly alarming because Canada exports about 75 percent of its goods and services to the USA.

economic challenges

The reduction in growth expectations is also reflected in the revised forecasts, which provide for growth of only 1.8 percent for 2025 and 2026, which is 0.3 percentage points lower than expected before. For inflation, an increase was forecast to 2.3 percent for 2025 (of 2.2 percent) and 2.1 percent for 2026 (of 2 percent). However, these estimates do not take into account the potential effects of the US tariffs.

The overall economic image of Canada shows a shrinking per capita economy over six consecutive quarters, whereby the growth is mainly due to the increase in population. Due to new immigration restrictions by the federal government, a decline in the population is even expected by 0.2 percent in 2025 and 2026.

market analysis and forecasts

Analysts are concerned about the ability of the BOC to master the balancing act between increasing inflation and economic growth. Doug Porter, chief economist at BMO Capital Markets, emphasized that the BOC may have to deal with interest rate cuts more aggressive if the effects of US tariffs should be shown. Money markets see a 43 percent probability for another interest rate of 25 basis points at the next meeting on March 12th.

The economic indicators have remained mixed; While inflation remains about 2 percent in January, the challenge is that economic growth remains weak. The BOC plans to end its quantitative tightening in March to support the economic dynamics.

Some analysts see the challenges in the Canadian economy as a structural nature. Geoff Phipps by Picton Mahoney Asset Management expressed criticism of the inadequate reactionability of the monetary policy measures. Prime Minister Justin Trudeau, on the other hand, has described the interest rate cuts as a step towards economic recovery.

The upcoming economic climate remains tense, and the Canadian government is faced with the challenge of reacting to both short and long-term economic risks and uncertainties.

For detailed information about the interest policy of the Bank of Canada and the Wirtschafts forecast, visit , Capital and Investment Week .