Top banks predict lower rates down the line as trade row rumbles on
The Bank of Canada’s 25-basis-point rate cut on Wednesday, its seventh reduction in a row, is unlikely to be its last of the year as Canada-US trade chaos continues, according to leading economists.
The central bank opted to trim its benchmark rate to 2.75% yesterday, a decision that came as little surprise after a madcap week that’s seen US president Donald Trump ramp up his rhetoric against Canada and launch an unpredictable trade war against North American allies.
Trump opted to delay most of those tariffs – which include 25% surcharges on all Canadian imports except energy, levied at 10% – until April 2, but slapped big charges on Canadian steel and aluminum on Wednesday amid a wave of retaliatory measures from Ottawa.
With financial markets sent into a tailspin by the imbroglio, Bank of Canada governor Tiff Macklem highlighted the potential economic damage a protracted trade war could wreak.
“We’re now facing a new crisis,” he said in a press conference after the central bank’s announcement. “Depending on the extent and duration of new US tariffs, the economic impact could be severe. The uncertainty alone is already causing harm.”
And economists believe the Bank will be in a mood to slash rates further if the trade war gathers pace.
The Bank of Canada has cut its benchmark interest rate by another 25 basis points, making a seventh straight reduction as the Canadian economy gears up for the potential seismic shock of a trade war with the United States. https://t.co/pBNdLGHHE6
— Canadian Mortgage Professional Magazine (@CMPmagazine) March 12, 2025
Some analysts say more cuts than originally expected on the way
Describing Wednesday’s cut as “a Band-Aid, for a wound of unknown size,” Canadian Imperial Bank of Commerce (CIBC) chief economist Avery Shenfeld said the bank was still expecting rates to fall by a further 25 basis points at each of the next two announcements – but added that they could slide further if the trade tussle begins to pummel the Canadian economy.
“A longer and more protracted trade war would entail a major recession, with the extent of further rate cuts being dependant on how strongly fiscal policy steps in to support growth, and on evidence showing that the initial upswing in prices is starting to be offset by downward pressure on inflation from greater economic slack,” he wrote.
Bank of Montreal (BMO), meanwhile, views three more quarter-point reductions as the likeliest outcome, although it also believes further cuts could be necessary depending on the severity of the trade war.
BMO chief economist Doug Porter said the central bank’s tone had been “balanced” on the trade threats so far, keeping both growth threats and the inflation risk in mind, but suggested a gloomy outlook on the economy was likely to prevail.
“We strongly suspect that the weak growth impact will dominate and, while the Bank’s caution means it will proceed very slowly, the ultimate destination for rates is lower than the market now expects,” he wrote. “That’s even more so the case if the trade war deepens further than the current planned US tariffs.”
Bank of Canada keeps inflation squarely in sight despite trade chaos
TD economist Derek Burleton also believes further rate cuts are on the way, with the banking giant forecasting a 2.25% BoC benchmark rate by the middle of this year.
“The threat of punitive US tariffs has shaken confidence in Canada’s economy. This will weigh on consumer spending and investment, slowing economic growth,” he said.
“That’s why the Bank of Canada wants to ensure the economy is prepared by giving Canadians a bit of a cushion.”
But Derek Holt, Scotiabank’s vice president and head of capital markets, said the Bank’s Wednesday cut was a hawkish one that emphasized its continuing commitment to making sure inflation expectations remain anchored.
Market expectations of an April cut are now under half – but that’s probably “too rich” an assessment, Holt wrote.
RBC also noted that the central bank would probably have left rates unchanged but for the trade dispute, although it’s still expecting decisionmakers to continue cutting.
“Our own base-case has assumed further BoC interest rate cuts to 2.25% around mid-year,” senior economist Claire Fan wrote. “We continue to expect (and consistent with BoC communications today) that there won’t be a race to the bottom for interest rates beyond those previously expected cuts this year.”
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