The Bank of Canada is penalizing people doing exactly the right thing with their money.

The best defence for your finances in a trade war is having cash in savings accounts. But by lowering its overnight rate on Wednesday by 0.25 of a percentage point, the central bank engineered a small decline in the amount of interest flowing to prudent savers.

Welcome to trade war economics, where governments and central banks fight with crude weapons that produce some collateral damage.

Retaliatory tariffs are a clear example – they make U.S. goods more expensive to import, and that means higher prices for Canadian consumers on some items. The latest interest rate cut is a similar story.

Cutting interest rates is the Bank of Canada’s way of inviting businesses and consumers to buy stuff with borrowed money. But let’s get real. We’re in an unprecedented trade war with our country’s onetime best friend, led by an erratic President working off a playbook literally no one in Canada understands.

Even with lower rates, this is a terrible time for business and consumers to make big financial commitments involving borrowed money. Why did the Bank of Canada cut rates, then? Because adjusting rates is sometimes a symbolic act as much as a practical one. Not cutting rates could almost be seen as negligence.

There are some winners in this and all rate declines – existing borrowers with variable-rate mortgages, lines of credit and floating-rate loans. Anyone who renewed a mortgage recently and chose a variable-rate mortgage, this fresh rate reduction validates your call. It’s possible there could be more Bank of Canada rate cuts if the trade war hammers the economy, and more declines in your mortgage rate.

Fixed-rate mortgages are a tougher call. They’re influenced mainly by rates in the bond market, which is currently trying to make sense of how a trade war will affect economic growth, inflation and the risks involved in owning bonds issued by heavily indebted countries like the United States. For now, fixed rate mortgages are holding in place.

The Bank of Canada cut rates by 0.25 of a percentage point, which is the bare minimum and less than the 0.5 percentage point “jumbo cut” that indicates a higher level of urgency. But there are other developments in the economy that sharpen this rate cut for people who park money safely in bank and investment savings accounts.

Most people focus on the nominal rate of return on their savings, which means the published rate. What really counts is the after-inflation number, or the real rate of return. Expect real rates of return on savings to be attacked from two directions in a long trade war.

The Bank of Canada could lower its overnight rate further, and inflation will rise from its current level of 1.9 per cent. A weakening Canadian dollar contributes to higher living costs, as do those counter-tariffs applied on U.S. goods coming into Canada. If it’s any consolation, U.S. tariffs on goods from Canada make life more expensive for Americans.

Normally, rising inflation puts pressure on the Bank of Canada to increase interest rates. But it’s nearly impossible to justify rate hikes with the economy weakening. This is how we end up with savers squeezed by both falling rates and higher inflation.

Two formidable challengers to the big banks, EQ Bank and Wealthsimple, have been lowering their rates for savers in synch with changes to the Bank of Canada’s overnight rate. Expect similar declines in the rates available from savings products for investors, including investment savings accounts and money market funds.

When the stock market and the economy thrive, it’s normal to hear people question the idea of earning minimal amounts in a savings account when strong returns are available elsewhere. There’s no room for this sort of rationalization now.

Stocks are vulnerable, gold is unpredictable, crypto is unfathomable and those “alternative” products the investment industry have on offer should be treated with skepticism. Often, these products are a black box of complexity and high fees.

What we’re left with is an unfortunate reality of trade war economics and personal finance. At a time of rising inflation and economic risk, savers will make less.

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