Bank of Canada cut interest rates again, how to deal with the economic difficulties in the shadow of the trade war?

The Bank of Canada recently cut its benchmark interest rate by a quarter of a percentage point, a decision that not only marked the seventh consecutive rate cut, but also revealed the serious challenges facing the Canadian economy. The policy rate was cut to 2.75 per cent, a figure underpinned by economic pressures from the intensifying tariff war with the US. Economists generally expected this move, but the economic difficulties reflected behind the rate cut are worth our in-depth discussion and analysis.

In a recent speech, Bank of Canada Governor Tief McCollum made it clear that the trade war with the United States is creating unprecedented uncertainty in Canada's economy. He mentioned that signs of stable inflation and the economic momentum driven by previous rate cuts are at risk, and this risk mainly stems from the evolving threat of tariffs in the United States. This uncertainty has not only shaken business and consumer confidence, but also caused economic damage. Macklem warned that the severity of the economic damage would depend on how high the tariffs were and how long they lasted, and that economic growth in the second quarter of 2025 would be hit hard if the dispute continued.

In fact, evidence that the Canadian economy is heating up by 2025 might have been enough to make the central bank adopt a wait-and-see approach to further rate cuts. However, the sudden trade war has upset the balance. Avery Shenfeld, chief economist at CIBC Capital Markets, said in a note that it was the trade war that forced the central bank to rethink its monetary policy. He noted that without the disruption of a trade war, the central bank might be watching the economy more carefully, but the reality is that the shadow of tariffs is already hanging over Canada's economy.

U.S. President Donald Trump followed through on a tariff threat against Canada in April, imposing a 25 percent tariff on Canadian steel and aluminum. The decision not only marks the next phase of Trump's tariff agenda, but also has a direct impact on Canada's economy. Canada announced on the morning of the same day that it would retaliate with retaliatory tariffs, but it is still unclear whether this move will effectively offset the economic damage caused by the tariffs.

McCollum told a news conference that Canadians can expect to pay more in the coming months because of the trade dispute. He singled out perishables such as fresh fruits and vegetables, whose prices would be hit first. Durable goods with longer production cycles may experience higher costs later. "The reality is that some prices will go up. We can't change that." Such price increases will not only increase the cost of living for consumers, but are more likely to further depress consumer demand, thereby putting more pressure on the economy.

At the same time, the Bank of Canada also released a supplementary survey of consumers and businesses. The survey, which specifically responded to the specter of tariffs in late January and February, showed that Canadians are planning to spend less because they fear losing their jobs as a result of the trade dispute. The concern is particularly strong in sectors vulnerable to tariffs, such as manufacturing. About 40% of business leaders surveyed said they were scaling back hiring plans. This data undoubtedly further confirms the negative impact of the trade war on the Canadian economy.

When asked if the Bank of Canada believes the economy is headed for a recession, Bank of Canada Senior Deputy Governor Carolyn Rogers did not respond directly. But she also acknowledged that consumer and business sentiment had shifted considerably. Businesses are slowing investment and hiring, while Canadians are more inclined to save than spend. These changes undoubtedly pose a threat to economic growth.

Rogers also noted that inflation expectations are rising for both businesses and consumers. If left unchecked, this trend could fuel inflation itself. She said the central bank will closely monitor this development and take the necessary monetary policy to respond. McCollum also stressed that the bank will use monetary policy to ensure that the price shock of tariffs does not turn into lasting inflation. However, in the context of uncertainty, the central bank cannot provide forward guidance and will proceed cautiously with future interest rate changes.

As for future economic trends, Macklem said much depends on how the United States handles its trade policy. He pointed out that the central bank needs to watch the developments in the United States and make decisions based on the actual situation. Shenfeld, on the other hand, expects central banks to place more emphasis on growth risks than inflation in the near term. He thinks that leaves room for two more rate cuts before June. However, whether this prediction is accurate still depends on a combination of factors.

From an economic perspective, the Bank of Canada's decision to cut interest rates is undoubtedly a response to the current economic situation. However, whether this response will be effective in alleviating economic pressures and boosting economic growth remains an open question. In the shadow of the trade war, Canada's economy is facing unprecedented challenges. Businesses and consumers need to plan their financial and investment strategies more carefully to deal with possible risks. The government needs to take more aggressive and effective measures to boost economic growth and protect domestic industries from tariffs.

In addition, we should also note that the trade war will not only have a negative impact on Canada's economy, but it is more likely to trigger turmoil in the global economy. Therefore, countries should strengthen cooperation and dialogue to jointly deal with the challenges brought about by trade disputes. Only through cooperation and consultation can we find an effective way to resolve trade disputes and maintain global economic stability and development.

To sum up, the Bank of Canada's decision to cut interest rates is a response to the current economic situation, but it cannot fundamentally solve the economic dilemma. In the shadow of the trade war, Canada's economy still faces huge challenges. We need to analyze the economic situation more deeply and take corresponding measures to deal with possible risks and challenges. Only in this way can we ensure that Canada's economy can continue to grow steadily and create more well-being for the people.