TORONTO, March 18, 2025 – Canada’s economic outlook has taken a sharp downturn as the Organization for Economic Co-operation and Development (OECD) warns that a full-blown tariff war sparked by U.S. President Donald Trump could force the Bank of Canada to hike interest rates by up to 1.25%. The OECD’s latest report, released Monday, slashes Canada’s growth forecast by more than half, projecting a mere 0.7% GDP increase for 2025 and 2026—a steep 1.3 percentage point drop from its December estimate. This grim prediction hinges on the potential imposition of 25% U.S. tariffs on Canadian goods, alongside retaliatory measures, which could unravel the economic gains Canada achieved by the end of 2024.
The ripple effects of such trade barriers would be profound, driving inflation to 3.1% in 2025—well above January’s 1.9%—and keeping it elevated at 2.9% in 2026, according to the OECD. Core inflation is also expected to hit 3.1%, breaching the Bank of Canada’s target range and stoking fears of entrenched inflation expectations. The report highlights how policy uncertainty will deter Canadian businesses and households from investing in capital and durable goods, while global trade disruptions, including U.S.-China tariffs and 25% levies on steel and aluminum, exacerbate the strain. In contrast, a scenario where the U.S. extends tariff exemptions under the Canada-United-States-Mexico Agreement (CUSMA) beyond April 2 offers hope, boosting Canada’s growth to 1.3% annually and sparing Mexico from a projected 1.3% contraction.
The Bank of Canada, which recently lowered its key rate to 2.75% with a 25-basis-point cut last week, now faces a delicate balancing act. The OECD cautions that widespread tariffs would necessitate a significant rate increase—higher than the 0.25 to 0.5 percentage point rise expected in other major economies—potentially keeping borrowing costs elevated for an extended period. This comes as inflation expectations, which had been aligning with central bank targets late last year, show signs of resurgence in both Canada and the U.S. The report warns that a combination of rising inflation and slowing growth could “trigger a rapid repricing in financial markets and a further rise in market volatility,” threatening financial stability.
Comparatively, the U.S. economy is expected to fare better, with GDP growth projected at 2.2% in 2025 and 1.6% in 2026, despite slight downgrades. Mexico, however, faces the bleakest outlook among OECD nations, underscoring the vulnerability of North American trade partners to Trump’s policies. The OECD suggests that a lighter tariff scenario could allow policymakers to continue rate cuts, as slowing growth offsets price pressures. For now, the Bank of Canada remains vigilant, with officials stating they will closely monitor inflation trends in future decisions, as Canada braces for the economic fallout of a potential trade war.
xAI Inferences and Considerations
The OECD’s dire warnings likely reflect deeper structural risks not fully detailed in the report. Canada’s heavy reliance on exports—approximately 30% of its GDP comes from trade with the U.S., according to Statistics Canada [source: https://www.statcan.gc.ca]—amplifies its exposure to tariff shocks. Historical precedent, such as the 2018 U.S. steel and aluminum tariffs under Trump’s first term, suggests Canada may face significant supply chain disruptions, particularly in industries like automotive and manufacturing [source: CBC News, https://www.cbc.ca/news/business]. The projected 1.25% rate hike could also strain Canada’s housing market, already burdened by high debt levels, with the Canada Mortgage and Housing Corporation noting household debt-to-income ratios at 181% in 2024 [source: https://www.cmhc-schl.gc.ca].
Additionally, the OECD’s focus on inflation expectations hints at a psychological dimension to the crisis. Rising consumer and business pessimism could accelerate wage demands and price hikes, creating a feedback loop that entrenches inflation—a scenario reminiscent of the 1970s stagflation period. The report’s omission of potential Canadian retaliatory tariffs’ specifics suggests a strategic ambiguity, possibly to avoid escalating tensions prematurely. Furthermore, the disparity in growth forecasts between Canada and the U.S. may signal a shift in North American economic power dynamics, with the U.S. leveraging its larger market to weather the storm while Canada and Mexico bear the brunt. Political pressure on Prime Minister Justin Trudeau to negotiate exemptions could intensify, especially with CUSMA’s review looming in 2026.
Keywords: Bank of Canada interest rates, Trump tariff war Canada, OECD economic forecast 2025, Canada GDP growth, inflation Canada 2025, CUSMA tariff exemptions, U.S.-Canada trade tensions
