TORONTO – Despite a situation of great uncertainty, the Bank of Canada is expected to cut interest rates by a further 0.25%, which should thus fall to 2.75%. The trade war – constantly evolving – with the United States should therefore not influence, at least for the moment, the choices of the Canadian central bank which finds itself having to establish monetary policy at a time when inflation has shown signs of “resistance” and the economy seems to be regaining strength, however in a context of total uncertainty generated by the continuous announcements and U-turns of US President Donald Trump on tariffs.
“This is a very difficult position for the Bank of Canada” said Randall Bartlett, deputy chief economist of the Desjardins Group, to Global News. In the event of a prolonged Canada-U.S. trade war, inflation will likely rise in the short term due to trade disruptions, and job losses in the hardest-hit sectors could quickly pile up if those sectors do not receive an extension of tariffs, Bartlett said, who also predicted Canada would fall into recession by mid-year if high tariffs remain in place.
We are far from the trajectory the Canadian economy was on entering 2025. Late last year, there were signs that the central bank’s previous interest rate cuts were starting to filter through to the economy, with all signs that 2025 would be a year of recovery, following the Bank of Canada’s six consecutive cuts to bring the interest rate to 3%. But then Trump’s “tariff shock” came along and all the predictions went out the window.
CIBC expects the central bank to still make a quarter-point cut on Wednesday, lowering the benchmark rate to 2.75%, with further cuts to follow this year if trade uncertainty persists, although Bartlett says the Bank of Canada’s room for maneuver will be limited by the Canadian dollar’s declining position. The loonie is vulnerable not only to trade war blows, but also to a widening differential between key rates in Canada and the United States. If the Canadian central bank lowers its key rate too sharply, the loonie could also fall, leading to a greater increase in inflation on food and other goods imported from the United States.
In short: the only certainty, at this moment, is uncertainty.
In the pic above: Tiff Macklem, Governor of the Bank of Canada (photo from the Facebook page of Bank of Canada)