On March 12, 2025, the Bank of Canada (BoC) lowered its key overnight rate by 25 basis points to 2.75%, the central bank’s seventh consecutive cut. While every BoC announcement is watched closely, this latest move drew widespread attention given today’s unprecedented geopolitical and macroeconomic turmoil. The BoC had been expected to pause interest rate cuts and allow previous cuts to work their way through the economy, but US trade pressure forced a shift in strategy.

To be sure, the BoC is caught in a difficult situation. Following a steady rise in inflation coming out of the pandemic, the BoC executed a string of interest rate increases to help cool an overheated economy. Inflation subsided and the economy struggled to find its footing again, prompting the BoC to continue its delicate balancing act by lowering interest rates aggressively to help stimulate growth.

Just as the Canadian economy began stabilizing, the Trump administration’s levying of tariffs on Canadian goods entering the U.S. put new pressure on Canada’s economy, including its labour market at a time when  the employment rate has shown signs of stalling. Keep in mind that tariffs would also have a negative impact on the U.S. economy as consumers and businesses pay more for goods exported from Canada.

These tariffs have sparked further action, with both countries imposing or alluding to reciprocal tariffs and other protectionist policies. For instance, the U.S. responded to Ontario’s potential 25% tariff on electricity it exports to certain U.S. states by issuing its own threat to raise tariffs (from 25% to 50%) on steel and aluminum it imports from Canada this week. These tariffs were pulled back on news that Ontario Premier Doug Ford and Federal Finance Minister Dominic Leblanc had arranged a meeting in Washington on March 13 to discuss trade issues with U.S. Secretary of Commerce Howard Lutnick. While no specific steps were taken to resolve the matter, Ford characterized the meeting as productive and both sides have pledged to continue discussions.

To add more complexity, new Prime Minister Mark Carney must act decisively as he deals with the potential consequences of these tariffs, plus a federal election may soon be called, further complicating matters as a newly elected government will be compelled to “hit the ground running.” Unsure of how the trade war may intensify or how long it will last, the BoC is addressing this economic uncertainty by reducing interest rates – with possibly more rate cuts on the way, depending on how events unfold. The next BoC interest rate decision is slated for April 16.

Withstanding Short-Term Challenges

Considering that our cost of living may rise amid this growing tariff battle, lower interest rates should help Canadians weather the storm by making it less costly to borrow money and service existing debt. It’s also valuable to stay focused on your long-term financial plan and maintain a well-diversified investment portfolio to help mitigate the impact of heightened market volatility. If you have any questions about your financial plan, feel free to consult with your Alterna Advisor.

Learn more

Recently we wrote about tariffs and what opportunities and challenges may arise from these evolving circumstances, so you can read about this important development and explore ways to help make the most of the current situation.