Bank of Canada Cuts Rates As Expected, Ends QT, Restarts QE, And Drops Guidance On Looming Trade War

The Bank of Canada cut interest rates by a quarter percentage point to 3% as expected, ending quantitative tightening and dropping guidance on further adjustments to borrowing costs. The move was widely anticipated by markets and economists due to President Trump's tariff threat clouding the outlook. The central bank will restart asset purchases in early March, beginning gradually to stabilize and then grow its balance sheet modestly in line with economic growth. The bank expects the economy to strengthen gradually and inflation to stay close to target, but a broad-based trade conflict would test the resilience of Canada's economy. Governor Tiff Macklem said monetary policy has worked to restore price stability, but a trade conflict would badly hurt economic activity and put direct upward pressure on inflation. The bank removed guidance on further rate cuts, considering the 200 basis points of easing since June as substantial. The bank forecasts GDP growth will strengthen in 2025, with inflation staying close to the 2% target over the next two years. The bank also cut its growth forecasts for 2025 and 2026 due to government policies designed to curb population growth. The central bank will restart its term repo program and treasury bill purchases, and made changes to the deposit rate to improve its effectiveness and support short-term funding markets. Overall, the bank is taking a wait-and-see approach to tariffs and any economic fallout from them.