The Bank of Canada, as expected in the Econoday consensus forecast, again cut its target interest rate by 25 basis points from 3.0 percent to 2.75 percent, as the central bank shifts its attention to protecting against the drag on economic activity from punitive tariffs imposed by the United States.

"[H]eightened trade tensions and tariffs imposed by the United States will likely slow the pace of economic activity and increase inflationary pressures in Canada, the BoC statement said. The economic outlook continues to be subject to more-than-usual uncertainty because of the rapidly evolving policy landscape.

The central bank expects growth to slow down in the first quarter of 2025 as the trade conflict negatively affects sentiment and economic activity. The labor market will also be adversely impact, with the BoC noting warning signs that heightened trade tensions could disrupt the recovery in the jobs market.

It expects inflation to remain close to its target, rising from 1.9 percent in January to about 2.5 percent in March once the suspension of sales taxes expires. In addition, short-term inflation expectations have risen driven by worries about the impact of tariffs on prices.

Monetary policy cannot offset the impacts of a trade war, it said. What it can and must do is ensure that higher prices do not lead to ongoing inflation.

Governing Council will be carefully assessing the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs, the statement said.

With tariffs hitting the Canadian economy, all the BOC can do is cut rates. The consensus looks for a succession of 25 bp rate cuts including March 12.

Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.

Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.

Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.