BMO and RBC warn tariffs could drive interest rates lower, while policymakers assess economic fallout
Two of Canada's largest banks, Bank of Montreal (BMO) and Royal Bank of Canada (RBC), predict that interest rates may decrease more rapidly and reach lower levels than previously expected due to the escalating trade conflict with the United States.
According to BNN Bloomberg, this development follows US President Donald Trump's executive order imposing a 25 percent tariff on most Canadian imports, with energy products facing a 10 percent tariff, effective from 12:01 am EST on Tuesday.
Douglas Porter, BMO's chief economist and managing director of economics, indicated that the Bank of Canada might implement more frequent interest rate cuts in response to the trade dispute.
Porter stated, “We now look for the quarter-point pace to continue in each of the next four meetings until July, taking the rate to two percent.”
He also acknowledged the fluidity of the situation, suggesting that further adjustments could be necessary as more information becomes available regarding Canada's fiscal response and potential US countermeasures.
Similarly, RBC's chief economist, Frances Donald, and assistant chief economist, Cynthia Leach, noted that the Bank of Canada has been “noncommittal” about its response to the newly imposed tariffs.
They observed that the longer these tariffs remain in effect, the higher the likelihood of more rapid and substantial rate cuts.
The economists emphasized that the manner in which federal and provincial governments provide fiscal stimulus to offset the negative impacts of a prolonged trade conflict will significantly influence the central bank's decisions.
Porter cautioned that while the Bank of Canada's primary focus will be mitigating the adverse effects of an economic slowdown and potential recession, it must also remain vigilant about inflation.
He noted, “There will be a measure of caution in the policy easing, with inflationary pressures simultaneously prodded by retaliatory tariffs and Canadian dollar depreciation.”
The Bank of Canada is scheduled to announce its next policy decision on Wednesday, March 12.
As the trade conflict unfolds, market experts anticipate that the central bank may implement additional rate cuts to support the economy.
Some forecasts suggest that the policy rate could fall to 2.25 percent by the end of 2025, reaching the lower end of the neutral range.
In related developments, the Canadian dollar has experienced fluctuations as investors assess the sustainability of the newly imposed US tariffs. Despite recent declines, the loonie edged higher by 0.2 percent against the US dollar on Tuesday.
Additionally, as per Reuters, the Canada Pension Plan Investment Board (CPPIB), the country's largest pension fund, has called for urgent economic diversification to mitigate the impact of these tariffs.
Chief Investment Officer Edwin Cass emphasized the need for Canada to become more globally competitive in light of its close economic ties to the United States.
The imposition of tariffs has also raised concerns about broader economic consequences.
The Times reported that analysts warn that such protectionist measures could lower growth and raise inflation in the US, while potentially causing deflationary effects worldwide.
In Canada, the economy is heavily reliant on exports to the US, and the tariffs could lead to a projected GDP decline of 2.6 percent.
The integrated North American automotive sector, which conducted over US$110bn in bilateral trade during 2023, faces potential disruption due to these tariffs.
