Canada central bank keeps rates steady amid looming US tariff threats

Bank of Canada Keeps Lending Rate at 2.75%

On Wednesday the Bank of Canada announced a pause in policy adjustments, holding the key borrowing rate steady at 2.75%. The decision comes amid heightened trade tension between Canada and the United States, just two days before the U.S. president’s tariff deadline.

Why the Canada–U.S. Trade Link Is at Risk

• Deep Economic Integration – Canada’s economy is tightly woven with its southern neighbor, making it especially vulnerable to any U.S. protectionist moves.
• Potential 35% Tariff Spike – President Donald Trump has threatened to raise tariffs to 35% on certain goods if a new trade agreement is not reached by Friday.
• Existing Strain – The Canadian economy already feels the squeeze from U.S. trade policies, so further tariff escalation could prove damaging.

Official Comments from Bank of Canada Governor

After the announcement, Governor Tiff Macklem expressed optimism but remained cautious:

• “Let’s hope there’s an agreement between Canada and the United States. Let’s hope it’s a good agreement,” Macklem told reporters.
• She acknowledged that “there is a sense that U.S. policy may well remain unpredictable.”
• She added, “There’s a sense that it’s going to be hard to restore that trust, in the United States as an economic partner.”

Bank’s Brief on U.S. Trade Policy

The bank’s statement highlighted the fluid nature of trade negotiations:

• “While some elements of U.S. trade policy have started to become more concrete in recent weeks, trade negotiations are fluid (and) threats of new sectoral tariffs continue.”

Context: Canada’s Rate Policy History

Canada was the first G7 nation to start cutting rates last year, following several hikes aimed at taming inflation fueled by the pandemic. The rate pause reflects the bank’s assessment that economic conditions remain fragile, yet policy adjustments are needed to support growth while maintaining stability.

Canada’s Central Bank Governor Tiff Macklem Responds to U.S. Tariff Uncertainty

Three Consecutive Rate Pause – The Bank of Canada’s latest forecast indicated a third straight halt in policy tightening, largely driven by the new tariff regime under President Trump. Macklem acknowledged the challenge of forward‑looking economics amid an “unusual amount of uncertainty.”

U.S. Tariffs Impact on Canadian Exports – The central bank outlined a scenario where U.S. tariff effects could be muted if imposed levies exclude goods compliant with the existing trade deal Trump signed and praised during his first term. According to the forecast:

• 100 % of energy exports could remain tariff‑free.
• 95 % of all other exports – excluding auto parts – may be compliant with the United‑States‑Mexico‑Canada‑Agreement (USMCA).

Auto Sector in Trouble – Trump’s auto tariffs are expected to persist, adding further strain to the Canadian automotive industry. The sector has already experienced layoffs and production shifts triggered by the president’s push for more cars made entirely in the United States. Canadian auto plants are highly integrated with U.S. production sites, with parts crossing back and forth across the border multiple times during assembly.

Prime Minister Mark Carney Tightens Expectations

Prime Minister Mark Carney has recently cautioned against overoptimistic hopes for a comprehensive trade deal with the United States. He has stated a tariff‑free agreement may not be achievable and would not endorse a pact that does not benefit Canada. Carney, who previously led the Bank of Canada and the Bank of England, also warned that the recently agreed U.S.‑EU pact should not be used as a template for Canada.

Geographic Proximity Matters – Carney highlighted the differences in geographic proximity as a key factor in shaping Canada’s trade stance.

Bank of Canada Considers Future Rate Cuts

The Bank of Canada has not ruled out additional rate cuts later in the year to assist struggling borrowers. CIBC economist Andrew Grantham noted that the bank appears “getting a little more comfortable” with the notion that the Canadian economy may require further interest rate support.

Tariffs and Inflation Monitoring – Macklem emphasized that the bank will act if tariffs drive inflation. He assured reporters that the bank will “make sure that a tariff problem does not become an inflation problem.”