The Bank of Canada is set to announce whether it will cut interest rates Wednesday as an escalating trade war looms over the Canadian and American economies.
U.S. President Donald Trump on Tuesday escalated his trade war against Canada, threatening to double the tariffs on steel and aluminum from Canada from 25 per cent to 50 per cent.
Those are set to go into effect on Wednesday, the same day as the rate decision.
While inflation in Canada has been below two per cent and Canada’s unemployment rate has held steady, the threat of tariffs is expected to inform the Bank of Canada’s decision.
In January, the central bank cut its benchmark interest rate by 25 basis points, bringing the policy rate down to 3.0 per cent. Economists are expecting a further rate cut on Wednesday.
“The Bank’s job is to keep an eye further out on the horizon than a month or two. It can’t reopen a shuttered factory with a few rate cuts, but it can support domestic demand as an offset,” CIBC economist Avery Shenfeld said in a note on Monday.
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Shenfeld added, “Another quarter-point cut next week might be only chicken soup for the economy’s soul, but as they say, even if it can’t help much, it couldn’t hurt.”
Tu Nguyen, economist at RSM Canada, said, “The Bank of Canada is expected to drop its interest rate by 25 basis points at the announcement.”
The Royal Bank of Canada assistant chief economist Nathan Janzen said that without tariffs, the Bank of Canada would have forgone a rate cut. However, tariffs change the equation.
“We expect the Bank of Canada interest rate decision on Wednesday will be a very close call as our base case forecast assumes it will forego a rate cut for the first time since April 2024, but U.S. trade risks could still easily tilt odds towards a seventh consecutive cut,” Janzen said in a note Friday.
Last month, Bank of Canada governor Tiff Macklem had warned that the tariffs could significantly hit Canada’s economy.
“In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened,” Macklem said. “This time, if tariffs are long-lasting and broad-based, there won’t be a bounceback.”
Macklem said while Canada could recover part of the growth, the damage would be long-lasting.
“We may eventually regain our current rate of growth, but the level of output would be permanently lower. It’s more than a shock — it’s a structural change,” he said.
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