Central Bank of Canada reduces key borrowing rate, attributing the decision to Trump's tariffs
The Bank of Canada has lowered its key interest rate from 2.75% to 2.5% in response to a decline in the Canadian GDP and a drop in exports. According to recent data, the Canadian economy contracted by roughly 1.5% in the second quarter of 2025, with Canadian exports falling by a significant 27%.
The decline in exports was largely due to a decrease in rush orders from the United States, as businesses had stocked up on goods before the full implementation of Trump's tariffs in the first quarter. The tariffs, which have affected key sectors such as autos, steel, and aluminum, have caused damage and resulted in job losses.
The Bank of Canada's decision to lower the interest rate was made in consideration of the impact of these tariffs on Canadian businesses heavily dependent on exports to the United States. Central Bank Governor Tiff Macklem has stated that less US demand for Canadian exports is due to the presence of tariffs.
The Bank of Canada is also expressing concern about further tariff damage and the prospect of Trump seeking major revisions to the USMCA, which presents further economic risk to Canada. The USMCA deal, agreed during Trump's first term, is up for review in 2026. The focus is shifting to this upcoming review, with the Office of the U.S. Trade Representative (USTR) initiating the process for public consultation and a hearing in November 2025.
Given the broad uncertainty about the path ahead, the central bank will be more cautious than normal about issuing future guidance. Desjardins economist Royce Mendes has predicted an additional interest rate cut at the bank's next meeting in October.
However, the tariff rate for most Canadian exports to the United States remains low, as the majority of products fall under the United States-Mexico-Canada Agreement (USMCA). People are looking for new suppliers and new customers, according to Macklem, but the eventual consequences of these shifts remain uncertain, including on inflation.
Canada was the first G7 country to begin cutting interest rates last year. The Bank of Canada warned it would proceed cautiously, given the risk that US protectionism could drive up inflation.
Businesses are facing new costs as they try to adjust to a different relationship with Canada's biggest trading partner. The ongoing uncertainty and potential for further economic disruption have cast a shadow over the Canadian economy, with many looking towards the USMCA review in 2026 for a clearer picture of the economic future.
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