The Bank of Canada cuts interest rates by 25 points to 3%! The US trade war has impacted the economy, putting pressure on the Canadian dollar to fall!
The Bank of Canada lowered its overnight interest rate target to 3% today, marking the sixth consecutive rate cut by the central bank.
The central bank also warned that the trade war with the United States may suppress economic growth in the coming years.
Bank of Canada Governor Tiff Macklem pointed out that although inflation has remained near the 2% target since August and household spending is recovering, the trade conflict with the United States may cast a shadow over the economic and inflation outlook.
If the trade conflict persists for a long time and is widespread, it will seriously damage Canada's economic activity, while at the same time, the rising cost of imported goods will bring direct upward pressure on inflation
According to the foreign exchange website XE, the Canadian dollar fell to a nearly 5-year low against the US dollar, reaching 69.25 cents.
The Canadian dollar fell to a nearly 2-year low against the Chinese yuan, reaching 5.02 yuan.
The Bank of Canada simulated various tariff scenarios in its Monetary Policy Report (MPR). In its benchmark model, assuming price changes are similar to the last tariff implementation, if the United States imposes a 25% tariff on Canadian goods and Canada implements an equivalent retaliatory tariff, Canada's gross domestic product (GDP) at the end of the first year will decrease by 2.5 percentage points.
In the second scenario, if the decline in demand for Canadian goods in the United States is greater, Canada's economic growth will be impacted by 3 percentage points. In either case, the Consumer Price Index (CPI) inflation rates in Canada and the United States are expected to rise over the next three years.
Unfortunately, tariffs will lead to a decrease in economic efficiency, and our production and income will be lower than without tariffs. Monetary policy cannot offset this impact, and all we can do is help the economy adapt, "said Tiff Macklem, the governor of the central bank
He added that the central bank only has one policy tool: interest rates, which cannot simultaneously address the two opposing trends of slowing economic growth and rising inflation.
Image source: XE
Without tariffs, the central bank has lowered its 2025 GDP growth forecast from 2.1% to 1.8%, mainly due to:
The federal government lowered immigration targets in the fall, resulting in a slowdown in population growth;
Due to the threat of tariffs, Canadian investment confidence has declined and businesses have reduced their investments.
The monetary policy report states, "In Canada, the threat of tariffs has had a negative impact on consumer and business confidence and investment intentions." In addition, "this threat is also the main reason for the recent depreciation of the Canadian dollar
The main reason for the depreciation of the Canadian dollar: tariff uncertainty rather than interest rate differentials
Regarding the recent significant depreciation of the Canadian dollar, the central bank stated that although the widening interest rate differential between Canada and the United States has had some impact on the exchange rate, the main reason is still the market uncertainty caused by tariff threats, which has pushed up the foreign exchange hedging premium.
In addition, the central bank announced the end of quantitative tightening (QT) and adjusted the deposit rate to 5 basis points lower than the policy rate.
Monetary Policy Report: Rising Uncertainty
The People's Bank of China stated in a press release that the January Monetary Policy Report (MPR) released today was affected by uncertainty beyond normal levels, mainly due to the rapidly changing global policy environment, particularly the threat of trade tariffs that the new US government may implement. Due to the unpredictable scope and duration of potential trade conflicts, this baseline forecast does not include the impact of any new tariffs.
According to predictions, the global economy is expected to maintain a growth rate of approximately 3% in the next two years. The expected increase in US economic growth is mainly due to strong consumption; The Eurozone may experience sluggish growth due to competitive pressures; China's recent policy stimulus has driven demand and supported short-term growth, but structural challenges still exist. Since October of last year, the financial situation of various countries has been differentiated. The yield of US treasury bond bonds has risen due to strong growth and sustained inflation, while the yield of Canadian treasury bond bonds has declined slightly. Affected by trade uncertainty and the strengthening of the US dollar, the Canadian dollar has depreciated significantly against the US dollar. The oil price fluctuates greatly, with a recent increase of about $5 compared to October expectations.
Canadian Economic Outlook
The past interest rate cuts have begun to promote economic recovery, and consumption and housing activities have recently rebounded and are expected to continue to strengthen, but corporate investment remains weak. The export prospects are supported by the increased export capacity of oil and natural gas.
The job market remains weak, with an unemployment rate of 6.7% in December. In the past year, labor force growth has been faster than employment growth, and recently employment growth has begun to rebound. The pressure of wage growth is still high, but there are signs of easing.
The Bank of Canada predicts that GDP growth will strengthen in 2025, but due to the government's downward adjustment of immigration indicators, population growth will slow down, resulting in lower GDP and potential growth than expected in October. The GDP is expected to grow by 1.3% in 2024, with an average annual growth rate of 1.8% in 2025 and 2026, slightly higher than the potential growth rate. Therefore, excess capacity in the economy will gradually be absorbed during the forecast period.
Inflation situation
CPI inflation is still close to 2%, but there will be some fluctuations in the short term due to the government's temporary cancellation of the Goods and Services Tax/Combined Tax (GST/HST) on some consumer goods. Housing price inflation remains high, but is expected to gradually slow down. Core inflation is close to 2%. The central bank expects CPI inflation to remain around the 2% target for the next two years.
If the potential tariffs imposed by the United States are not taken into account, the upward and downward risks of the economic outlook are basically balanced. However, long-term trade conflicts may lead to a slowdown in Canada's GDP and push up domestic price levels.
Given that inflation remains around 2% and there is still excess capacity in the economy, the Central Bank Management Committee has decided to further lower the policy interest rate by 25 basis points to 3%. Since June last year, the cumulative interest rate cuts have been significant. Lower interest rates are driving household spending, and the central bank expects the economy to gradually strengthen with inflation remaining at target levels. However, if the United States implements widespread and high tariffs, the resilience of the Canadian economy will be tested. The central bank will closely monitor the development of the situation and assess its impact on economic activity, inflation, and monetary policy.
The next announcement of policy interest rates by the Bank of Canada will be on March 12th.
Source link:
https://www.bankofcanada.ca/2025/01/fad-press-release-2025-01-29/
https://financialpost.com/news/economy/bank-of-canada-cuts-rate-to-3-percent-0129