By Max Sato
(MaceNews) – The Bank of Canada on Wednesday is widely expected to trim its policy interest rate – the target for overnight lending rates – by another 25 basis points to 2.75% from 3.0%, conducting its seventh straight rate cut, first to ease the pain of high borrowing costs caused by its own credit tightening and more recently to help cushion the drag from a global trade war launched by the Trump administration.
That would follow a 25-basis point reduction in January and two consecutive 50-basis point slashes, in December and October, and three 25-basis point cuts since June when the bank began unwinding the effects of its past aggressive tightening.
With Wednesday’s action, the BOC would now deliver a total 225 basis points (2.25 percentage points) in credit easing. Previously, it raised the policy rate by a total of 475 basis points between March 2022 and July 2023, jacking up the key rate through 10 increases from its record low of 0.25% to a 22-year high of 5.0%.
The bank is also in a process to complete the normalization of its balance sheet, ending quantitative tightening. It restarted asset purchases in early March, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy.
In his post-rate decision remarks, Governor Tiff Macklem is expected repeat that the U.S. trade policy is “a major source of uncertainty” and that “there are many possible scenarios.”
The worst part of the Trump tariff war is that companies cannot have firm plans for capital investment or employment as the U.S. president either imposes new tariffs or suspends punitive duties that he has already put in place almost on a daily basis, and U.S. trade partners respond with their own measures or scale back their earlier retaliatory actions.
Hours after threatening to double incoming import tariffs on Canadian steel and aluminum, President Trump is now keeping them at their original rate of 25%. After talking to U.S. Commerce Secretary Howard Lutnick, Ontario Premier Doug Ford on Tuesday removed a 25% surcharge on electricity exports to three U.S. states, New York, Minnesota and Michigan, in return for the lowered duties on steel and aluminum. The 25% tariffs on all steel and aluminum the U.S. imports, including from Canada, were set to take effect at midnight on Wednesday.
“With little confidence given the lack of historical precedent, we estimate that the tariffs will reduce real GDP growth by roughly 1.5 percentage points to around 0.5% in 2025,” BMO Financial Group Chief Economist Douglas Porter wrote in a report. “This reflects reduced demand for Canadian exports to the U.S. (which account for about a fifth of GDP), disrupted supply chains impeding business activity and consumption, and heightened uncertainty that reduces business investment.
Porter also points to an expected reduction in domestic demand due to higher prices stemming from retaliatory tariffs and a weaker Canadian dollar.
“The estimated growth hit is a bit lighter than the Bank of Canada’s recent scenario (it called for about a 2.5 percentage point reduction in GDP growth for the first year), due to the lesser 10% tariff on energy products, as well as the fact that Canada’s retaliation is measured,” Porter said. “However, we recognize the difficulty in modelling such an extreme event, and certain sectors may not behave in a predictable or linear pattern—e.g., the highly integrated auto industry.”
Porter describes the BOC’s rate cut in late January as “a risk management move” compelled by the rising risk of U.S. tariffs.
“With that risk now being realized, we reckon the bank will lean against the expected significant economic slowdown and steeply escalating risk of recession along with associated disinflationary pressures,” he said. “However, there will be a measure of caution in the policy easing, with inflationary pressures simultaneously prodded by retaliatory tariffs and Canadian dollar depreciation.”
Consumer inflation in Canada has been stable in a range of 1.8% to 2.0% for four months until the latest data month of January after easing to a low of 1.6% in September from 2.9% at the start of 2024 and improving substantially from 5.9% in January 2023 and a recent peak of 8.1% in June 2022. But the inflation outlook for the U.S., Canada and beyond is uncertain now.
“Previously, we projected the bank would cut the policy rate two more times this cycle, by 25 bps in April and July (ending at 2.50%),” Porter said. “We now look for the quarter-point pace to continue in each of the next four meetings until July, taking the rate to 2.0%. The net risk is that we eventually go even lower, if the bank is comfortable with the prevailing inflation backdrop later this year.”