Bank of Canada Cuts Interest Rate to 2.75% Amidst a Trade War with the U.S.

On March 12, the Bank of Canada cut its key lending rate, which impacts interest rates by 25 basis points from 3% to 2.75% This marks the seventh straight interest rate cut by the central bank since June 2024.

Since last summer, the Bank of Canada has reduced its key lending rate by 225 basis points (2.25%), taking one of the most aggressive rate-cut strategies among global central banks.

The interest rate cut was widely expected amidst a trade war with the U.S. and the impact it could have on the Canadian economy. The Governing Council said that the Canadian economy grew more than expected in the fourth quarter at 0.6%, but growth is expected to slow due to trade conflict with the United States.

The central bank also noted that President Trump’s chaotic on-again off-again tariff threats have shaken consumer confidence and hurt business investment expectations. Meanwhile, the end of tax credits is expected to juice inflation from 1.9% to 2.5%.

The big question is how far the Bank of Canada will need to cut interest rates. Economists at two of the country’s biggest banks believe that interest rates should fall faster and lower as the consequences of a trade war with our biggest trading partner impact the broader economy. The general consensus is that Canada’s interest rate should fall to 2%.

What Can the Federal Government and Provinces Do to Combat a Trade War?

Monetary policy from the Bank of Canada can only go so far at protecting the Canadian economy in the event of a trade war with the U.S. Keep in mind, that Canada’s new Prime Minister, Mark Carney, was once the Governor of the Bank of Canada and has a much better grasp of economics than former Prime Minister Justin Trudeau does.

The central bank will play a secondary role in responding to the trade war, with the provinces and Ottawa taking the primary lead, much like they did during the 2020 health crisis. This could result in financial support for both businesses and employees.

President Trump’s chaotic on-again off-again tariff policies and threats to the Canadian economy have sent shockwaves. Those headwinds are expected to persist through all four years of President Trump’s administration.

That’s a long time for investors to deal with uncertainty. What investors tend to do during periods of prolonged volatility is hold a diversified portfolio which can include classic defense plays like dividend-paying stocks.

Dividends in companies with reliably growing dividends and high payouts can protect investors from the near-term roller-coaster rides on Bay Street and Wall Street.

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