TORONTO -- Canada’s central bank lowered its key interest rate by half a percentage point on Wednesday and called President-elect Donald Trump's threat to impose sweeping new tariffs on Canada “a major source of new uncertainty.”
The Bank of Canada's decision marked the fifth consecutive reduction since June and brings the central bank’s key rate down to 3.25%. Forecasters were widely expecting a big rate cut after the November labor force survey showed the unemployment rate rose to 6.8%.
Governor Tiff Macklem said in his prepared statement that the central bank opted for two large rate cuts in a row because inflation and economic growth don’t need to be restricted anymore. With inflation back at the 2% target, the central bank is now focused on keeping it there.
But the central bank noted a number of risks to the economy including Trump's 25% tariff threat.
“The possibility the incoming U.S. administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook,” the bank's statement said.
Trump has threatened to impose a 25% tax on all products entering the U.S. from Canada and Mexico unless they stem the flow of migrants and drugs.
“We did underline that the threat of new tariffs on Canadian exports, particularly at the level suggested, that is a major source of new uncertainty,” Macklem said at a press conference. “But the reality is we don't know if those tariffs are going to be implemented.
"We don't know if exemptions are going to be agreed on some parts, we don't know at what level, we don't know if Canada will take retaliatory measures.”
He said all those factors are important, adding it's probably having some impact already.
“There's no question that if the tariffs were to moved forward at the levels suggested it would be highly disruptive to the Canadian economy," Macklem said. “It would also be very disruptive to the U.S. economy. Hopefully that doesn't happen but we did highlight it as a risk.”
Canadian Prime Minister Justin Trudeau said tariffs would be “absolutely devastating" for the Canadian economy, but it would also mean real hardship for Americans.
Economists say companies would have little choice but to pass along the added costs, dramatically raising prices for food, clothing, automobiles, alcohol and other goods.
The Produce Distributors Association, a Washington-based trade group, has said tariffs will raise prices for fresh fruit and vegetables and hurt U.S. farmers when the countries retaliate.
Trudeau said this week the government is still mulling over “the right ways” to respond, referencing when Canada imposed duties in 2018 against the U.S. in a tit-for-tat response to new taxes on Canadian steel and aluminum.
About 60% of U.S. crude oil imports are from Canada, and 85% of U.S. electricity imports as well.
Canada is also the largest foreign supplier of steel, aluminum and uranium to the U.S. and has 34 critical minerals and metals that the Pentagon is eager for and investing for national security.
Nearly $3.6 billion Canadian (US$2.7 billion) worth of goods and services cross the border each day. Canada is the top export destination for 36 U.S. states.