Trump recently imposed a 25 per cent tariff on non-energy imports from Canada, alongside a 10 per cent levy on energy imports. In response, Canada unveiled retaliatory tariffs of 25 per cent on $30 billion worth of U.S. goods, with plans to escalate this to $155 billion in three weeks should the U.S. tariffs remain.
With the economic impact of the tariffs now a reality, many economists believe the Bank of Canada will move to counter the potential slowdown. BMO chief economist Douglas Porter stated that the central bank is likely to take action to mitigate the anticipated economic contraction and rising risks of a recession, alongside the deflationary pressures associated with such a downturn.
As a result, Porter predicts that the Bank will likely continue with quarter-point rate cuts at each of its next four meetings, bringing the rate to 2.0 per cent by July. He also noted that there is a possibility the Bank could cut rates even further if inflation conditions remain stable later in the year.
The chances of a rate cut next week have surged in the wake of the tariffs. According to Reuters, investors are now pricing in about an 80 per cent likelihood that the Bank of Canada will reduce rates on March 12, up from just below 50 per cent earlier in the week when stronger-than-expected GDP data caused some to scale back expectations for a cut.
Scotiabank economist Derek Holt also anticipates the Bank of Canada will cut rates, stating that the tariffs likely tip the balance in favour of a reduction. However, Holt cautioned that the central bank would adopt a measured approach, mindful of the long-term effects of the tariffs on supply chains and inflation.
Desjardins’ Royce Mendes echoed these sentiments, stating that while the uncertainty surrounding a resolution to the trade dispute makes forecasting difficult. He added that the central bank is “very likely” to cut rates in the short term. Mendes suggested that cuts in April are highly probable even if the tariffs are lifted before the Bank’s next decision.
He added that the depth of the central bank’s easing cycle will depend on how long the trade war lasts and how it affects economic performance and inflation. Mendes also highlighted that monetary policy is ill-equipped to address a supply shock caused by tariffs.
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