Star Metro - Canada central bank cuts key lending rate citing Trump tariffs

The Bank of Canada reduced the rate to 2.5 percent, after holding it at 2.75 percent since March as it weighed the impact of Trump's fluctuating tariffs on Canadian businesses heavily dependent on exports to the United States.

But the bank said there was now clear evidence Trump's protectionism was inflicting damage on key, targeted sectors -- notably autos, steel and aluminum, which have all suffered job losses.

"Tariffs are weakening the Canadian economy. You can see that very clearly in the directly affected sectors," central bank Governor Tiff Macklem told reporters after the announcement.

The bank noted Canada's GDP declined roughly 1.5 percent in the second quarter of 2025.

In the first quarter, exporters benefitted from a rush of orders from the United States as businesses tried to stock up before Trump's tariffs fully took hold, the bank said.

But Canadian exports fell by 27 percent in the second quarter as rush orders eased.

There "is less US demand for our exports because there's tariffs," Macklem said.

- New trade deal? -

Trump has so far maintained tariff exemptions on goods compliant with an existing North American free trade agreement, partly muting the damage to Canada's economy.

Macklem stressed the tariff rate for most Canadian exports to the United States remains low, as the vast majority of products fall under the trade pact, known as the United States-Mexico-Canada Agreement (USMCA).

But that deal, agreed during Trump's first term, is up for review in 2026.

The prospect that Trump may seek major revisions has created further risk for Canada.

"With some stability in US tariffs in recent weeks, near-term uncertainty may have come down a little, but the focus is shifting to the upcoming (USMCA) review," Macklem said.

Canada was the first G7 country to begin cutting rates last year, following several hikes to tame pandemic-fueled inflation.

While Wednesday's cut was largely expected by analysts, the bank warned it would proceed cautiously, given the risk that US protectionism could drive up inflation.

Macklem told reporters that businesses are facing new costs as they try to adjust "to a different relationship with (Canada's) biggest trading partner."

People are looking for new suppliers and new customers, he said, adding that the eventual consequences of those shifts remain uncertain, including on inflation.

Given the broad uncertainty about the path ahead, Macklem said the central bank would be more cautious than normal about issuing any future guidance, as it closely watches export figures over the coming weeks.

Desjardins economist Royce Mendes predicted an additional cut at the bank's next meeting in October, but said it was clear the bank was worried about further tariff damage.

"The Bank of Canada still seems wary of assuming that all of the impacts of US trade policy are in the rearview mirror," he said.

G.Boudreau--SMC