The Bank of Canada (BOC) has trimmed its key policy rate by 25 basis points to 3 percent, cut growth forecasts and warned Canadians that a tariff war triggered by the United States could cause major economic damage.

“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada,” Governor Tiff Macklem said in opening remarks to a news conference on Wednesday. The prospect of such a war is clouding the economic outlook.

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US President Donald Trump is promising to impose a 25 percent tariff on all imports from Canada on Saturday. Canada sends 75 percent of all goods and services exports to the US.

If Canada and other nations slapped a retaliatory 25 percent tariff on the US, this could cut Canadian growth by 2.5 percentage points in the first year and another 1.5 percentage points in the second year, the bank said, noting that this was not a forecast but a hypothetical scenario.

Wednesday’s cut marked the sixth time in a row that the bank has reduced borrowing costs. Inflation has consistently stayed around the mid-point of the bank’s 1-3 percent target range but economic growth is still sluggish.

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“With inflation around 2 percent and the economy in excess supply, Governing Council decided to reduce the policy rate a further 25 basis points to 3 percent,” the bank said in a statement.

The Canadian dollar was down 0.3 percent at 1.44 against the US dollar after the decision.

Tough situation

Money markets see a more than 43 percent chance of another 25-basis-point cut at the BOC’s next monetary policy decision announcement on March 12.

“The Bank of Canada would be in a tough situation but our view is that they would become more aggressive in terms of rate cuts if that’s [US tariffs] what we’re faced with,” said Doug Porter, chief economist at BMO Capital Markets.

The bank’s challenge is that US tariffs might both drive up inflation – in theory, prompting the need for higher rates – and also cut growth, which could on paper mean more stimulus in the form of lower rates.

“With a single tool – our policy interest rate – we can’t lean against weaker output and higher inflation at the same time,” Macklem said. The bank though could help the economy adjust, especially given that inflation is low, he said.

The bank also announced that its quantitative tightening programme, designed to drain the excess liquidity it pumped into the economy during the pandemic, would end in March.

The BOC, which has been among the most aggressive top central banks in cutting rates, trimmed the country’s economic growth outlook to 1.8 percent in 2025 from the 2.1 percent predicted in October. The economy will grow by 1.8 percent in 2026, down from growth of 2.3 percent forecast earlier.

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The central bank lifted its forecast for inflation to 2.3 percent from 2.2 percent in 2025 and to 2.1 percent from 2 percent for 2026. The projections do not take into account possible US tariffs.

Canada’s economy has been shrinking on a per-capita basis for six consecutive quarters and most of the growth observed has been supported by an increase in population.

With the federal government’s new curbs on immigration, Canada is likely to see a population decline of 0.2 percent in both 2025 and 2026.