Photo by Michelle Spollen on Unsplash

The decision today by the Bank of Canada (BoC) to lower its policy rate by another ¼ point is taken as if one is in darkened room, not knowing exactly how to avoid bumping into the furniture.

Starting the new year, the Canadian inflation rate was at the 2% target, giving the BoC latitude to continue to lower rates. The last two quarters of 2024 were a welcome surprise, as the economy expanded by 2.6% in Q4 and 2.2% in Q3. The economy was a solid footing starting the new year.

This performance seems to belong to ancient history. The trade war dominates every discussion surrounding consumer sentiment and investment intentions in Canada. Encouraged as we were with the renewal of economic growth in the second half of 2024, we can no longer expect this smooth performance to continue, especially in the face of Trump’s erratic behaviour.

The BoC correctly made the decision to lower the bank rate in response to “the pervasive uncertainty created by continuously changing US tariff threats is restraining consumers’ spending intentions and businesses’ plans to hire and invest.”

Clearly, the BoC has opted to promote economic growth by lowering the cost of borrowing. For the time being it has put aside concerns about inflation. Right now, BoC surveys reveal a slowdown in household spending and in business capital formation. 

CIBC researchers argue that a sustained increase in a tariff war will push inflation upwards, but that job losses and a generally weaker economy will reduce national income. The CIBC research shows that inflation, in the short term, will give way to a disinflationary impact. It most likely that the BoC will shape rate policy in the future towards offsetting income losses above all else.

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