The central bank is treading carefully on the question of lowering rates again, but it may have no other choice
US president Donald Trump’s trade war with Canada is rolling on – and don’t expect the huge uncertainty it’s casting over the Canadian economy to disappear anytime soon.
Bank of Canada governor Tiff Macklem reiterated in a Calgary speech on Friday that the country continues to face an economic crisis borne by Trump’s tariffs and underlined the enormous lack of clarity caused by the US administration’s unpredictability on the issue.
There remains “a lot we don’t know,” the central bank chief said – not least how long new tariffs on steel and aluminum, and goods uncompliant with the Canada-US-Mexico Agreement, will remain in place.
What’s more, it’s unclear whether new tariffs will come into play in other areas. “In the last two months, the US administration has twice imposed and then retracted universal tariffs on all imports from Canada and Mexico,” Macklem pointed out. “President Trump has also threatened to extend tariffs to a wide range of industries, including autos, semi-conductors and pharmaceuticals.”
Trump has also touted April 2, the date so-called “reciprocal” tariffs on many countries are set to come into play, as “LIBERATION DAY IN AMERICA” although Macklem noted it remains unclear precisely what those measures will entail.
Five years after COVID-19, Canada faces a new crisis: a trade war with the US. Victor Tran from RATESDOTCA highlights the impact on the housing market, with tariffs and economic uncertainty dampening buyer confidence.https://t.co/2cPmauNHvO
— Canadian Mortgage Professional Magazine (@CMPmagazine) March 19, 2025
Don’t bet on a full pause on BoC rate cuts through the rest of the year
Speaking after the Bank of Canada’s decision to trim interest rates in March and prior to Macklem’s latest comments, Bank of Montreal (BMO) chief economist Doug Porter (pictured) told Canadian Mortgage Professional the central bank was clearly taking a measured approach as it navigated the trade chaos, particularly as it keeps a close eye on the consumer price index (CPI).
“The Bank is saying they’re going to proceed cautiously,” he said. “They can’t fight the trade war. There’s upside risk to inflation.
“But we believe, while all of that is true, the massive risk to [economic] growth will eventually dominate here, and whatever upside risks are to inflation from a weak currency and retaliatory tariffs will eventually get swamped by the hit to our export industries and when people start losing their jobs in manufacturing, I think that’s really going to undercut most of the inflationary pressure.”
Benjamin Reitzes, BMO’s managing director, Canadian rates, said Macklem’s Friday comments indicated the central bank was reluctant in the short term to continue cutting.
“If the Bank has more certainty around tariffs in April, that could help firm up the policy path,” he wrote, but said its “appetite for further rate cuts appears to be muted, at least for now.”
How will the Federal Reserve’s approach impact the Bank of Canada?
Canada’s central bank continuing to cut rates while the Federal Reserve south of the border holds steady can also damage the loonie, with the Fed opting against a rate reduction last week despite the growing economic uncertainty.
But the Fed’s so-called “dot plot” – which measures officials’ rate expectations – still shows officials expect two cuts before the end of the year, even if more members are slightly more hawkish than in December about the prospect of zero moves in 2025.
The US central bank’s statement also said the Fed Committee would be prepared to adjust its stance on monetary policy if it deems necessary.
Porter said the prospect of Fed cuts down the line would alleviate some concerns for the loonie. “No-one’s dismissing the inflation concerns in the US, but it’s the growth worries that are really starting to dominate. And we’re seeing that big time in the equity market,” he said. “Every time we get a flareup in the trade war, markets actually build in more Fed cuts, not less.
“And so this will take a little bit of pressure off the Canadian dollar because the market has really come around on the Fed. A month ago, people were saying the Fed might not cut rates at all this year and some voices out there were even saying they might raise rates. No-one’s talking like that anymore now that we’ve got the possibility of a steep slowdown in the US.”
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