trade tiff spurs Bank’s Tiff into action

This morning, the Bank of Canada cut its trend-setting policy interest rate by 25 basis points, bringing it down to 2.75%, its lowest level since August 2022. 

Prior to the United States’ imposition of tariffs on a range of Canadian exports (and Canada’s application of retaliatory tariffs on $30 billion worth of US exports coming north—with more to come), our expectation had been that the Bank would leave the overnight rate unchanged in response to a seemingly improving labour market, rising productivity, better-than-expected GDP growth, and a slight uptick in headline inflation. However, it’s clear that the threat to Canada’s economy posed by the current—and escalating—trade war with the United States necessitated interest rate relief sooner than later.

Though in the long-run tariffs are inflationary—yielding higher interest rates than would otherwise be seen in the absence of tariffs—the argument for easing monetary policy in the short-run is predicated on the need for capital to be available at a lower cost to support households and businesses that are negatively impacted by the tariffs. Further to this point, it’s worth noting that by virtue of sitting squarely in the middle of the Bank’s neutral range of 2.25-3.25%, today’s policy is not viewed by the Bank as being either expansionary or restrictive.

Heading into 2025, expectations were that the Bank would ease towards a rate floor of 2.50-2.75% by the middle of this year. With Canada now facing economic headwinds that threaten to push the country into a recession, and to the extent that the trade war with the US persists (or becomes more entrenched), we believe the Bank should respond with more forceful rate cuts at its upcoming meetings and consider moving towards a floor of 1.50-2.00% sooner than later. (The Bank next convenes on April 16th.) For his part, Bank of Canada Governor Tiff Maklem said that it would “proceed carefully with any further changes to [its] policy rate”. 

As a final note it must be said that monetary policy is, alas, an indiscriminate and blunt instrument not best suited to effectively support the Canadian economy during what are currently extraordinary circumstances. As such, it will be federal and provincial government fiscal policy, which can be tailored to meet the needs of those most impacted by the tariff war, that will (and should) be a major focus in the coming weeks and months.