Bank of Canada Weighs Rate Cuts

Major Canadian banks and economic analysts are debating whether economic weakness or new trade shocks will force the Bank of Canada to lower interest rates faster than previously expected. Economists at BMO and RBC suggest that the consequences of a trade war with the U.S., including new tariffs, could trigger a recession that necessitates deeper and quicker rate reductions [1]. Conversely, a separate analysis argues that current fiscal restraint and slowing growth already provide the central bank with enough room to begin cutting rates as early as June [2].

Key takeaways

• BMO expects the Bank of Canada to cut rates at each of the next four meetings until July, reaching two per cent [1].
• RBC economists believe the longer tariffs remain in place, the more likely rates are to fall faster and by a larger magnitude [1].
• One commentator argues that tax increases in the 2024 federal budget create room for a June rate cut to spur growth [2].
• Inflation has cooled to 2.9 per cent from a peak of 8.1 per cent, while the policy rate stands at 5.0 per cent [3].

Tariff fears drive bank forecasts

Forecasts from two of Canada’s largest banks have shifted following the implementation of a U.S. executive order imposing a 25 per cent tariff on most Canadian imports, with a 10 per cent tax on energy products [1]. Bank of Montreal chief economist Douglas Porter wrote that the bank now expects at least twice as many interest rate cuts this year compared to previous estimates, projecting the quarter-point pace to continue through July until the rate reaches two per cent [1]. Porter noted the risk is that rates could go even lower if the Bank of Canada is comfortable with the inflation backdrop later in the year [1].

Similarly, RBC economists Frances Donald and Cynthia Leach stated that while the central bank had been "noncommittal" about its reaction to tariffs, they now expect rates to fall faster and by a larger magnitude the longer the trade measures persist [1]. They added that the way