On March 12, 2025, the Bank of Canada reduced interest rates by 25 basis points, aligning with market expectations that were 96% in favour of a cut. Trade tensions with the United States are anticipated to slow economic activity and amplify inflationary pressures in Canada.
The US economy has shown signs of slowing, impacting Canadian growth projections for the first quarter of 2025. A decline in consumer confidence and reduced business spending was observed, with February witnessing stagnation in job growth.
Inflationary Pressures And Policy Responses
The Bank’s core inflation measures remain above 2%. The Governing Council will assess the economic situation closely, particularly the conflicting inflation pressures.
A press release from Governor Macklem indicated that uncertainty surrounding trade has affected both business and consumer behaviours, leading to cautious spending and lowered sales outlooks. Anticipated reductions in domestic demand and exports are expected in the coming months.
The move made by policymakers in Canada mirrors the adjustments taken by other central banks in response to weakening economic conditions. With trade disputes casting a shadow over projections, financial markets have already adjusted to expectations of slower growth. Inflation remains somewhat sticky, meaning that further cuts cannot be ruled out if economic activity softens at a faster pace than currently envisioned. Pricing models suggest that additional reductions may be necessary should inflation indicators refuse to ease towards the 2% target.
Macklem’s statement highlights concerns about the effects of reduced economic confidence on household and business decisions. When uncertainty lingers, firms reformulate hiring expectations, delay expansion plans, and refrain from non-essential expenditures. Consumers, in turn, react by holding back on discretionary purchases, which has a compounding effect on overall demand. That shift in behaviour can slow investment inflows and affect wage growth. Without a reversal in sentiment, economic activity is unlikely to rebound swiftly.
Labour Market And Economic Momentum
The latest employment figures reinforce these concerns. February’s data showed no meaningful job growth, adding to fears that the labour market is losing momentum. This stagnation, if prolonged, could further dampen consumer optimism, feeding into a broader slowdown. Additionally, expectations for wage increases may adjust lower, affecting spending power across different sectors. For those who rely on growth-driven revenues, such developments could necessitate a reassessment of risk exposure in the coming weeks.
With inflation running above the 2% mark, policymakers are walking a delicate line. An aggressive easing cycle could lead to imbalances by stoking domestic price pressures. However, tightening financial conditions too slowly may risk a deeper downturn than projected. The Governing Council’s next steps depend on the extent to which inflation and trade disruptions weigh on output. Conditions will be monitored closely to determine whether further action is warranted.
The trade outlook remains a central concern. With ongoing disagreements affecting cross-border commerce, Canadian exporters face barriers that could weaken foreign demand. Slower export growth would feed into declining business investment, further restraining domestic expansion. The extent to which firms pass costs onto consumers will play a considerable role in shaping price trends. This relationship between costs, pricing strategies, and demand will be essential to monitor over the next few months.
In the near term, expectations of dampened demand and uncertain trade conditions suggest volatility could persist. Central bank statements and incoming data will likely dictate pricing in various markets. Investors will need to reassess their position sizing and risk management strategies in response to shifting economic conditions. Decisions over the next several weeks will depend heavily on any indications regarding future policy direction and how inflationary trends unfold.
