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Investing.com - The Bank of Canada cut interest rates by 25 basis points as anticipated on Wednesday, as policymakers warned that an ongoing trade spat between Ottawa and U.S. President Donald Trump is set to weigh on Canadian economic activity and push up domestic prices.
In a statement, the central bank said the country had entered 2025 in a "solid position" with growth "robust" and inflation near its 2% target level.
"However, heightened trade tensions and tariffs imposed by the United States will likely slow the pace of economic activity and increase inflationary pressures in Canada," the BoC said, adding that the broader outlook has been subject to "more-than-usual" uncertainty because of the rapidly-evolving nature of Trump’s tariff policies.
Against this backdrop, the BoC decided to slash its overnight rate to 2.75% from 3%, in line with expectations and a sharp 225-basis-point decline from nine months ago. Rates have now been reduced at seven straight meetings, as part of a wider bid to boost consumption and the Canadian housing market.
The BoC’s latest move comes as it is hoping to help prop up an economy that it predicts will "likely slow" in the first quarter as the intensifying trade conflict with Washington dents sentiment and activity.
Although price growth remains close to 2%, the BoC said short-term inflation expectations have risen "in light of fears about the impact of tariffs." Inflation is tipped to increase to about 2.5% in March, it predicted.
Still, officials warned that changes to monetary policy "cannot offset" the impacts of a trade war with the U.S.
"What it can and must do is ensure that higher prices do not lead to ongoing inflation," the BoC said.
This week has featured a ratcheting up in the on-and-off tariff saga between the U.S. and its neighbor to the north.
On Wednesday, Washington allowed tariffs on global steel and aluminum imports into the U.S. to come into effect on Wednesday. Canada is the largest supplier of the materials to its neighbor to the south.
Ottawa is due to announce retaliatory tariffs on the U.S. amounting to C$29.8 billion in response to the steel and aluminum levies, Reuters has reported, citing an unnamed Canadian official.
Trump also threatened on Tuesday to double import duties on Canadian steel and aluminum imports in response to a 25% levy imposed by the province of Ontario on electricity exports to the U.S. However, Ontario later dropped the trade tax and Trump backed down from his warning.
Meanwhile, it remains to be seen how incoming Prime Minister Mark Carney’s approach to trade negotiations with Washington will differ, if at all, from current leader Justin Trudeau.
"[Carney] has mentioned that he will continue to retaliate on U.S. tariffs and use the proceedings to help workers impacted by the U.S. tariffs and that he plans to find new markets for Canada’s exports," analysts at BofA said in a note to clients.