Interest rates expected to be cut by 25 basis points in March 12 announcement
The Bank of Canada is expected to cut interest rates down to 2.75 per cent tomorrow amid unrelenting uncertainty about US President Donald Trump’s proposed tariffs and slow job growth.
The expected rate cuts would be the seventh consecutive cut to the BoC’s overnight rate as it braces for the potential impact of Trump’s proposed full-scale tariffs.
Trump has changed his mind on an initial 25% blanket tariff twice already, having added a one-month exemption on Canada’s automotive industry while also relieving tariffs on goods that meet USMCA standards. Having to play a guessing game on what will be tariffed, when it will be tariffed and what per cent the tariffs will be create a large amount of unpredictability in the market, according to Darcy Briggs, senior vice president and portfolio manager at Franklin Templeton.
“Instead of a crystal ball, you’ve got a snow globe,” he said. “So it tends to be a little challenging to have any definitive outlook.”
Last month’s job stagnation was “another marker that suggests the economy is on a weak footing,” Briggs says. Canada only added 1,100 jobs, according to StatCan’s latest employment report. Inflation has also remained steady, something which could rise further if Trump’s full tariffs go ahead.
While other periods of volatility would at least provide a light at the end of the tunnel, Briggs suggests there is nothing to suggest that uncertainty will wane in the future, making it difficult for financial advisors to make solid market predictions.
“Any way you slice it, uncertainty is not growth positive. People tend to sit on their hands, businesses don't invest,” he said. “Activity grinds down to a bare minimum because you have no visibility on what’s occurring, especially when it’s all policy driven.”
The BoC’s political neutrality and high levels of data dependency compared to other central banks allows it to stay nimble with its decision-making, according to Jack Manley, executive Director and global market strategist at J.P. Morgan Asset Management Canada. He echoed Briggs in suggesting that the expected rate cuts are being used as a defence against any further tariff announcements.
The market’s unpredictability is proof of the value in long-term, diversified investments, according to Manley. He suggested fixed income is “making more and more sense in portfolios,” though says he is only looking for high quality fixed income, and not extending credit in case of a recession.
“You want to be a long-term investor and you want to be a diversified investor,” Manley said.
With the lack of predictability available, Briggs suggests the expected rate cuts would be a wise decision from the BoC as a way of combatting the murky economic outlook Trump’s tariffs have caused.
“The fact that the BoC is likely to cut 25 basis points to take out some insurance is probably not a bad idea, considering they pride themselves on being risk managers,” he said.
Briggs suggests the BoC would have cut rates regardless of Trump’s tariffs, pointing to what he calls a “mortgage wall,” where those who bought homes in rates in 2020 and 2021, a period of exceptionally low interest rates, are now facing mortgage renewals which will inevitably be much higher than their initial rate.
The BoC should bring down rates to 2% by the end of the year according to Briggs, who notes the high level of consumer debt accumulated due to a long period of growth stagnation. Canada’s economy has been in a “stealth recession" according to Briggs, with low consumer spending and slow investment a recurring issue.
Briggs says Canada’s oil shock from 2014 to 2016 can be used as a point of reference if Trump’s tariffs are ever fully implemented. In response to the oil shock, the BoC cut its interest rates from 1% to 0.75%.
“This is even bigger than the oil shock because it affects all exports,” he said. “So in that regard, the Bank of Canada will likely need to take rates lower than 2%, depending on what the final tariff rate ends up settling at and what exactly is tariffed.”
