Economic Uncertainty in Canada
Canada’s central bank has decided to hold its key lending rate at 2.75 percent, citing economic uncertainty two days before President Donald Trump’s latest tariff deadline. The decision reflects the country’s vulnerability to Trump’s trade war, given the deep and broad ties between the neighboring economies.
The Impact of Trade War
Trump’s threat to hike tariffs to 35 percent on certain goods could wreak havoc on the Canadian economy, which is already strained by US protectionism. The Bank of Canada Governor, Tiff Macklem, expressed hope for an agreement between Canada and the United States, but conceded that US policy may remain unpredictable.
Unpredictable US Policy
Macklem noted that restoring trust in the United States as an economic partner will be challenging. The bank’s statement highlighted that trade negotiations are fluid, and threats of new sectoral tariffs continue to pose a risk. This uncertainty is making it difficult for the bank to be forward-looking in its economic projections.
Tariffs and Their Uncertainty
Canada was the first G7 country to begin cutting rates last year, following several hikes to tame pandemic-fuelled inflation. However, the bank has paused rate cuts for the third consecutive time, driven largely by Trump’s policies. A central bank forecast outlined a scenario where the impact of new US tariffs could be muted if new levies do not apply to goods compliant with the existing trade deal.
Exemptions for USMCA Compliant Goods
According to Drew Fagan, a tariff policy expert, if exemptions for USMCA compliant goods hold, Canada may not need a deal urgently. Research shows that the average tariff rate on Canadian goods entering the United States is currently two percent, highlighting that many Canadian goods are still crossing the border tariff-free.
The Auto Industry and Tariffs
Targeted sector tariffs are expected to remain, bringing further pain for Canadian auto workers who have seen layoffs and shift cuts triggered by Trump’s push to have more cars made entirely in the United States. Canada’s auto plants are highly integrated with US production sites, making them vulnerable to tariffs.
Prime Minister’s Caution
Canadian Prime Minister Mark Carney has tried to temper expectations, saying a tariff-free deal with Washington may not be possible. Carney has also noted that a recently agreed US-EU framework is not a template for Canada, citing geographic proximity as a key difference.
Conclusion
The Bank of Canada’s decision to hold its key lending rate reflects the country’s economic uncertainty amid Trump’s trade war. While the bank did not rule out rate cuts later this year, it stressed that it would act if tariffs drive inflation. As the Canadian economy navigates this uncertain landscape, it remains to be seen how the country will be affected by Trump’s tariffs and trade policies.
