Tiff Macklem warns tariffs could slow growth and drive inflation higher amid rising trade tensions with the US
The Bank of Canada lowered interest rates for the sixth consecutive meeting, aiming to support economic growth after inflation remained near the 2 percent target since mid-2024.
However, a potential US-Canada tariff war now threatens price stability and economic conditions, as reported by BNN Bloomberg.
The central bank’s latest decision and economic projections did not fully account for a possible trade conflict, which could begin as early as Saturday.
Instead, the bank presented a scenario in which the US enforces permanent 25 percent tariffs on all Canadian imports, prompting Canada to impose similar measures. This situation would gradually raise consumer prices, slow GDP growth, and impact trade in both countries.
Governor Tiff Macklem warned of the economic damage such a trade conflict could cause.
“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada. At the same time, the higher cost of imported goods will put direct upward pressures on inflation,” he said in prepared remarks.
He also stated, “Unfortunately, tariffs mean economies simply work less efficiently—we produce and earn less than without tariffs.”
If the US proceeds with the tariffs, American consumers would face higher prices for imported goods, driving inflation upward.
A stronger US dollar could offset some of the impact, but overall economic growth would weaken. Retaliatory tariffs from Canada and other nations would further harm US exports.
For Canada, the effects would be significant due to its heavy reliance on trade with the US. The country’s trade balance would deteriorate, and a weaker Canadian dollar—already declining against the US dollar—would compound economic challenges.
The increased cost of imported US machinery and equipment would reduce business investment, while falling export demand would lead Canadian companies to cut production and lay off workers.
This decline in employment would lower consumer spending on goods, services, and housing.
Government transfers funded by tariff revenues might offer some relief, but they would not fully counteract the economic downturn.
Macklem explained that while slower growth and falling commodity prices might ease inflation, other factors would push it higher.
A weaker Canadian dollar, rising business costs, and more expensive US imports—which make up about 13 percent of Canada’s consumer price index—would ultimately cause inflation to accelerate.
However, Macklem noted, “Absent the threat of tariffs, the risks to the inflation outlook are roughly balanced.” He stated that policymakers remain equally concerned about inflation moving above or below the 2 percent target.
Without factoring in a potential trade dispute, the Bank of Canada forecasts GDP growth to rise to 1.8 percent in 2025 and 2026, up from 1.3 percent in 2024.
The outlook for later years was revised downward due to Canada’s planned reduction in immigration, which is expected to slow population growth.
Macklem stated, “With inflation back around the 2 percent target, we are better positioned to be a source of economic stability.”
He added that the Bank of Canada will need to carefully assess downward pressure on inflation from economic weakness while weighing it against upward pressure from higher input prices and supply chain disruptions.
