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On March 12, 2025, the Bank of Canada (BoC) Governor, Tiff Macklem, addressed the central bank’s policy direction during a press conference following the decision to lower its policy rate by 25 basis points, bringing it to 2.75%. Governor Macklem also responded to questions from the media, elaborating on the uncertainties surrounding economic conditions and the BoC’s careful approach to monetary policy.
The governor emphasized that the Canadian economy is contending with a new crisis, largely fueled by heightened trade tensions and U.S. tariffs. This uncertainty, he noted, is already inflicting economic harm. Governor Macklem underscored that the impact of these developments on inflation remains unpredictable, and the pace at which costs translate into inflationary pressures is equally uncertain. In this context, he stated that the central bank cannot currently provide forward guidance but is committed to doing what it can to help the economy adapt to evolving U.S. trade policies.
Despite these efforts, the Bank of Canada faces limitations in its ability to counteract weaker growth and rising inflation simultaneously. Governor Macklem acknowledged that the first quarter of 2025 will likely experience weak domestic demand, as consumer confidence has sharply declined and business spending has slowed, according to recent surveys. However, the BoC did not seriously consider a 50 basis-point rate cut, opting instead for a more measured approach to addressing these economic challenges.
The governor pointed to ongoing unpredictability regarding potential U.S. policy actions and highlighted that the Canadian Dollar reflects these uncertainties. Decisions concerning monetary policy must account for these dynamics. Governor Macklem reiterated the BoC’s estimate of the neutral rate, centered at 2.75%, and emphasized the importance of monitoring shifts in trade policy and their effects on demand.
Looking ahead, the BoC warned that a trade war would likely lower demand and disrupt the recovery of the job market. A key concern is the rise in medium- and longer-term inflation expectations, which, if sustained, would serve as a significant warning sign for the central bank. With inflation expected to climb to 2.5% in March, the BoC plans to carefully evaluate the timing and magnitude of inflationary pressures while keeping a close eye on inflation expectations.
The policy rate adjustment elicited notable market reactions, with the Canadian Dollar gaining momentum and pulling the USD/CAD exchange rate to the 1.4400 range. This development reflects market anticipation of the BoC’s policy actions and their impact on Canada’s economic outlook. As uncertainty persists, the Bank of Canada emphasized its commitment to proceeding cautiously in its monetary policy decisions.
