The Bank of Canada lowered interest rates by 25 basis points to 2.25 per cent on Wednesday, but cautioned that monetary policy will play a limited role in mitigating the structural damage caused by the U.S. trade war .
The central bank said it made the cut as weakness ripples through the Canadian economy and with inflation expected to stay close to the bank’s two per cent target.
Canada’s economy shrank in the second quarter, the bank noted, as exports dropped and businesses made fewer investments because of trade-related uncertainty.
Because the U.S. trade war is having “severe effects” on tariff-hit sectors like autos, steel, aluminum and lumber, GDP is expected to be weak in the second half of the year, the bank said.
It added that the labour market is still showing weakness and hiring has slowed.
“The Canadian economy faces a difficult transition. The structural damage caused by the trade conflict reduces the capacity of the economy and adds costs,” the central bank said in its release.
“This limits the role that monetary policy can play to boost demand while maintaining low inflation.”
However, consumer spending has grown at a “healthy pace” and is expected to continue growing into the end of the year alongside real estate investment and government spending, the release noted.
The bank said it expects inflation to stay close to its target in the coming months and that inflationary pressures will ease as well.
If inflation and economic activity evolve “broadly in line” with the central bank’s projections, its officials think current interest rates are “at about the right level” to keep inflation on target while guiding the economy through a period of adjustment.
Governor Tiff Macklem and senior deputy governor Carolyn Rogers are expected to speak during a news conference at 10:30 a.m. ET. A livestream will be carried on this page.
