Canada's major banks expect a rate reduction on Wednesday, but the longer-term outlook is far from certain
Economists from Canada’s biggest banks are largely expecting another quarter-point cut from the Bank of Canada in today’s rate decision, which would bring the policy rate down to 2.75%.
The move would mark the seventh consecutive rate cut since June as the central bank attempts to navigate mounting trade tensions between Canada and the United States.
While the Trump administration recently delayed a sweeping 25% tariff on Canadian goods until April 2, the uncertainty surrounding the dispute has already impacted the economy. Meanwhile, a separate 25% tariff on steel and aluminum imports is still scheduled to take effect on March 12, adding to concerns.
Despite broad agreement on the likelihood of a cut, Canada’s major banks differ on their assessments of the economic outlook and how far the BoC should go with easing.
CIBC and TD on tariff war
CIBC economist Avery Shenfeld noted that although the 25% tariff was pushed back to April, the trade war remains a major risk. "A one-month reprieve means little," he said, explaining that many exporters had rushed shipments ahead of the deadline, which will likely weaken demand in the coming weeks.
Shenfeld added that even if the US drops the 25% tariff in April, it would likely be replaced with other measures, making it difficult for Canadian businesses to plan ahead.
While the Bank of Canada cannot fix structural economic damage caused by trade restrictions, Shenfeld said it can support domestic demand by continuing to ease rates.
"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," he said.
CIBC expects the BoC to continue cutting rates through the next few months, bringing the policy rate down to 2.25% by June, where it is expected to remain for the rest of the year.
TD economist Marc Ercolao said that the trade war has already distorted Canada’s economic data. He pointed to reports showing that US importers rushed to stockpile Canadian goods – including consumer goods, automotive products, and industrial machinery – before the tariffs were initially set to take effect.
While that activity provided a short-term boost to first-quarter GDP, Ercolao warned that the economic strength would be temporary. TD expects the BoC to cut rates on Wednesday as "insurance against a trade war escalation."
TD also cited Canada’s latest labour force data, which showed just 1,100 jobs were added in February after a gain of 76,000 in January. Economist James Orlando noted that winter storms may have contributed to the weaker job numbers but cautioned that hiring slowdowns could be an early sign of economic weakness due to trade policy concerns.
TD forecasts the policy rate to fall to 2.25% in the second quarter, where it is expected to stay through year-end.
Scotiabank, RBC not so certain
While most banks are calling for a cut, Scotiabank economist Derek Holt said that if not for the tariffs, the BoC would likely hold rates steady.
"The BoC would hold if not for the imposition of tariffs, but even the tariff effect isn’t a slam-dunk for a cut," he said.
Holt pointed out that core inflation remains near the upper end of the BoC’s target range, while GDP growth in the fourth quarter came in stronger than expected at 2.6%. He also noted that the majority of Canadian trade is compliant with the Canada-United States-Mexico Agreement (CUSMA), which could allow some industries to avoid the steepest tariffs.
Still, Holt acknowledged that tariffs on steel, aluminum, and energy products are likely to remain in place and that Trump’s threats of reciprocal tariffs on dairy and lumber could have further consequences. Scotiabank expects a 25-basis-point cut this month, but unlike other banks, it believes rates will hold steady at 2.75% for the remainder of the year.
Unlike in previous rate decisions, RBC economists Nathan Janzen and Claire Fan are less certain that the BoC will move ahead with a cut. They noted that inflation remains near the central bank’s 2% target, and GDP growth has been stronger than anticipated. However, they acknowledged that the unpredictability of US trade policy continues to pose risks.
"Trade risks are not going away," they wrote, adding that market confidence is being tested by rapid shifts in US policy. While RBC is leaning toward a rate cut on Wednesday, they suggested that if trade risks persist, further cuts could be needed later this year.
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RBC projects the policy rate will fall to 2.25% by the third quarter and remain at that level through 2025.
BMO predicts deeper cuts
BMO took a more aggressive stance, revising its forecast after Trump officially enacted the 25% tariff on Canadian goods on March 4. The bank now expects the BoC to cut rates at each of its next four meetings, bringing the policy rate down to 2% by July.
BMO economist Doug Porter argued that the BoC’s January rate cut was already driven in part by rising trade risks, and now that those risks are materializing, the central bank is likely to lean further into easing.
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"We have slashed our call for GDP through the rest of this year on the assumption that the tariffs will be fully reactivated on Canada on April 2," Porter said. He also noted that the separate 25% tariff on steel and aluminum imports set to take effect on March 12 will further strain the economy.
BMO believes that if inflation conditions allow, the BoC could cut rates below 2% later in the year.
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