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Bank of Canada cuts rates, says tariffs could stoke persistent inflation

The Bank of Canada on Wednesday trimmed its key policy rate by 25 basis points to 3%, cut growth forecasts and said it was concerned that U.S. tariffs could stoke persistently high inflation.

U.S. President Donald Trump is promising to impose a 25% tariff on all imports from Canada on Saturday. Canada sends 75% of all goods and services exports to the United States.

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

Macklem said that a big increase in tariffs would have an initial, one-off impact on Canada that monetary policy could not do much to counter.

"What we don't want to see though is that initial price level increase start to feed through broadly to other prices and wages and then become persistent inflation," he said.

If inflationary pressures come through faster than deflationary pressures, "monetary policy is going to have to be more focused on guarding against persistent inflation", he said, without specifically mentioning higher rates.

Macklem warned that a tariff war triggered by the United States could cause major economic damage.

Noting a hypothetical scenario, the bank said in its monetary policy report that if Canada and other nations slapped a retaliatory 25% tariff on the United States, this could cut Canadian growth by 2.5 percentage points in the first year and another 1.5 percentage points in the second year.

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% target range but economic growth is still sluggish.

"With inflation

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