The central bank is scheduled to make its first rate announcement of the year on January 29. Will Trump's plans change its approach?
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US president Donald Trump doubled down on his threat to impose 25% tariffs on Canadian goods on Tuesday evening, reiterating his intention to bring in the measure on February 1 – a move that would arrive just three days after the Bank of Canada’s first interest rate decision of the year.
The central bank highlighted the grave threat to the Canadian economy posed by Trump’s tariff plans in December, describing them as a “major new source of uncertainty” and a potential source of huge disruption to both the US and Canadian economies in 2025.
But Bank decisionmakers still seem unlikely to radically change course in next week’s rate announcement, scheduled for January 29 – mainly because it’s not clear quite how serious Trump is about following through on those threats, according to a leading economist.
Sherry Cooper (pictured top), chief economist at Dominion Lending Centres (DLCG), told Canadian Mortgage Professional the imposition of tariffs by the beginning of February seemed an unlikely prospect.
That’s partly because implementing those measures in such a short timeframe seems unfeasible, and also because the new president may be grandstanding as a prelude to renegotiating certain trade deals, according to Cooper.
“American agencies that would be asked to do the analysis of the practices in terms of trade and currency manipulation will not have the project completed by February 1,” she said.
“I think there’s a good chance that really what Trump wants to do is renegotiate the free trade agreement between Canada, Mexico, and the United States – and he renegotiated that in his last administration and tariffs were very short-lived, and I think the same thing could well happen this time.”
Trump’s first spell as president saw his administration impose tariffs on a host of Canadian imports including steel and aluminium, sparking a flurry of countermeasures by Canada’s federal government.
What can we expect from the BoC’s first decision of the year?
A new Bank of Canada survey indicated that almost a quarter of Canadian businesses believe their costs will rise during the Trump presidency, while 40% of companies expect a negative impact on their business and a third believe it’s too early to tell.
Still, there’s no expectation that the central bank will deviate from its current path amid those threats, with markets and analysts continuing to expect a 0.25% cut – especially as the inflation outlook continues to brighten.
As the Bank of Canada faces its first policy decision of the year on January 29, TD Bank economists, led by James Orlando, predict a 25-basis-point cut to 3.00%, citing economic resilience and strong consumer spending.https://t.co/xS9TpQzLbr
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 21, 2025
The federal government’s temporary tax holiday helped push the annual inflation rate down to 1.8% in December, Statistics Canada revealed this week, keeping a January rate cut on the table. “I just don’t think the Bank of Canada at this stage needs to take [tariffs] into consideration because they’ve been reducing interest rates as inflation has improved,” Cooper said.
“This week’s data showed a decline in inflation. That’s largely the result of the sales tax holiday, so the [latest] inflation numbers weren’t great, but I don’t think that’s going to derail the 25-basis-point cut that we’ve been expecting for next week.”
Could Trump tariffs torpedo the Canadian economy?
Economists have already highlighted the risk of US tariffs plunging the Canadian economy into recession. A CIBC analysis released this week said Trump’s plans could see Canada’s GDP slump by as much as 3.25%, even if those tariffs exclude industries like oil and gas.
If tariffs push the economy into recession, that would likely see interest rates slide – but Canada is also readying counter-tariffs in the face of that threat, a potentially inflationary response that could move both fixed and variable rates higher.
But Cooper said inflation would likely remain “pretty muted” in the face of a wider economic slowdown in Canada. “Very quickly we’d see rising unemployment and it’s already widely expected, according to the Bank of Canada [survey] anyway, that almost 50% of Canadians believe there will be a recession this year,” she said. “The psychology certainly isn’t positive.
“I’m not worried so much about the inflation effect of tariffs, but just how destructive it would be in terms of consumer spending and business spending – and it would result in retaliation, all of which could well be very short-lived just like it was back in his first term.”
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