Bank of Canada cuts interest rates by 25 basis points, warns of 'inflationary pressures'

The Bank of Canada has slashed its benchmark overnight rate by 25 basis points as US tariffs raised uncertainties and fears in global trade.

The key overnight lending rate now stands at 2.75 percent, its lowest since September 2022.

The interest rates of the bank rate and the deposit rate stand at 3 percent and 2.70 percent, respectively.

The bank stressed on Wednesday that the Canadian economy entered the year strong, with inflation slowing to the 2 percent 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," it said. "The economic outlook continues to be subject to more-than-usual uncertainty because of the rapidly evolving policy landscape."

It said the growth of Canada's economy is expected to slow in the first quarter of 2025 due to the effect of the "trade conflict," and recent surveys point to a sharp decline in consumer confidence and a slowdown in business spending as companies postpone or cancel investments.

The bank stressed that widespread uncertainty created by the ever-shifting threat of US tariffs is limiting consumers' spending plans and businesses' hiring and investment plans.

"Monetary policy cannot offset the impacts of a trade war. Governing Council 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 added.

Carney willing to meet Trump

Meanwhile, Prime Minister-designate Mark Carney said that he is willing to sit down with the Americans to negotiate an end to the trade war as long as "there is respect for Canadian sovereignty."

Carney said he respects US President Donald Trump's concerns for US workers and fentanyl, adding that "we are ready to sit down".

Carney will be sworn in as Canada's next prime minister on Friday morning along with his cabinet, the governor general's office announced on Wednesday.

Trump pledged a one-month deferral on items that adhere to a 2018 trade pact after enacting 25 percent duties on the majority of Canadian and Mexican imports last week.

He then threatened to impose significant new taxes on dairy and lumber products from Canada.

Early on Wednesday, 25 percent tariffs on Canadian steel and aluminium went into force.

Canada, in the meantime, has retaliated with tariffs on US products, including $21 billion worth of steel and aluminum products, taking effect on Thursday.