Bank of Canada Poised for Further Rate Cut Amid Intensifying Trade Tensions
Article published on March 11th, 2025 4:15AM UK Time
The Bank of Canada (BoC) is anticipated to reduce the target for the overnight rate by 25 basis points FROM 3.0% to 2.75% in its upcoming policy meeting. Market probabilities currently assign an 89% chance to this rate cut and a 11% likelihood of maintaining the current rate. This monetary policy adjustment is primarily driven by escalating trade tensions with the United States.
Escalation of U.S. Tariffs
On March 4, 2025, President Donald Trump implemented a 25% tariff on imports from Canada and Mexico, excluding Canadian energy products, which are subject to a 10% tariff. These measures aim to pressure both nations to enhance efforts in curbing illegal immigration and drug trafficking, particularly fentanyl, into the United States. In retaliation, Canada imposed 25% tariffs on $30 billion worth of U.S. goods, with plans to expand these measures to an additional $125 billion in the coming weeks.
Economic Implications for Canada
The newly imposed U.S. tariffs are expected to have substantial adverse effects on the Canadian economy. The BoC’s updated models indicate that Canadian output could decline by nearly 3% over the next two years if the U.S. tariffs persist, effectively nullifying growth forecasts for 2025 and 2026.Â
Despite a recent uptick in inflation— with the BoC’s preferred measure rising across the Trim and the Median prin – 2.7% for the Median from 2.6% prior and 2.7% for the Trim up from 2.5% prior – the central bank’s focus remains on mitigating the anticipated economic slowdown resulting from the tariffs. Governor Tiff Macklem has acknowledged that if the U.S. tariffs are prolonged and extensive, a swift rebound in the Canadian economy is unlikely.
Labor Market and Business Sentiment
The Canadian labor market has shown signs of strain, with a net increase of only 1,100 jobs in February and an unchanged unemployment rate at 6.6%. This sluggish job growth is partly attributed to uncertainties surrounding U.S. trade policies, which have led Canadian businesses to exercise caution in hiring and investment decisions.
Conclusion
In light of escalating trade tensions and their potential to derail Canada’s economic recovery, the Bank of Canada is expected to implement a 25 basis point rate cut, bringing the overnight rate target to 2.75%. This preemptive monetary policy move aims to cushion the economy against the adverse effects of U.S. tariffs and support domestic economic activity during this period of heightened uncertainty.
