Is Trump driving down Canada’s interest rates?

Photo: Gage Skidmore from Peoria, AZ, United States of America, CC-BY-SA-2.0, via Wikimedia Commons

Bank of Canada governor Tiff Macklem has warned that the national economy could suffer “dramatic” consequences if US president-elect Donald Trump follows through on his threat to impose sweeping tariffs on Canadian imports.

Speaking on Wednesday after the central bank’s latest interest rate cut – a second consecutive 50-basis-point drop – Macklem described Trump’s plans for a 25% levy on all Canadian goods crossing the border southwards as “highly disruptive” and “a major source of uncertainty,” although he also said it remained unclear whether the tariffs would be implemented.

Trump announced on November 25 that he intended to slap far-reaching tariffs on Canada and Mexico if those countries failed to address what he described as an influx of fentanyl and illegal immigrants across the border to the US.

That vow, issued in a Truth Social post, sent the Canadian dollar plunging and prompted a visit by Prime Minister Justin Trudeau to Trump’s base at Mar-a-Lago in an effort to smooth diplomatic relations.

Macklem told reporters that the Bank was “looking at different scenarios” and “analysis to prepare” for tariffs, which Trump said would arrive in January unless Canada cracked down on border security. If introduced, those US measures would “have a big impact on the Canadian economy and… dramatically impact our forecast,” he said. “Let’s hope that does not happen.”

Governor Tiff Macklem: “Monetary policy has worked to bring inflation back to the 2% target. Our policy focus now is to keep inflation close to target.” https://t.co/MTIriGgmQW#cdnecon pic.twitter.com/xOu4bLgH6P

— Bank of Canada (@bankofcanada) December 11, 2024

Could economic uncertainty push the BoC to cut rates by more than expected?

The central bank has now slashed its benchmark rate by 175 basis points in five successive cuts since June, bringing it down to 3.25% with further reductions likely in 2025.

Wednesday’s move, its final scheduled decision of the year, had been expected to contain a 25-point cut – but odds of a larger-than-anticipated slice surged in the wake of a jobs report that showed the unemployment rate jumped to 6.8% in November, its highest level for more than three years.

The Bank signalled on Wednesday that it now intends to adopt a more gradual approach on rate cuts, particularly with rates no longer “in restrictive territory.” Royal Bank of Canada (RBC) economist Claire Fan said that language suggests the central bank will return to 25-basis-point drops in 2025.

Still, there’s no end in sight to rate cuts, particularly with those looming tariffs weighing against growth prospects for a sagging economy. The darkening economic outlook, Fan said, “will [likely] push the BoC to cut the overnight rate all the ways down to a stimulative 2%.”

Speaking with Canadian Mortgage Professional, Bank of Montreal (BMO) chief economist Doug Porter said the housing market could stand to benefit from lower borrowing costs if the Bank feels it needs to cut rates in 2025 by more than it had originally anticipated.

“They’ll do what they can to support the economy and the winner from that will be consumer spending and the housing market,” he said, “if the Bank of Canada really has to lean on lowering interest rates even more rapidly to support growth.”

Wednesday’s rate decision marked the Bank of Canada’s final announcement of the year – and its last before Trump’s inauguration, scheduled to take place on January 20.

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