Under the "tariff shockwave," Canada may have to continue cutting interest rates tonight!
Market and economists generally expect that the Bank of Canada will conduct its seventh interest rate cut of the year today, lowering the policy rate to 2.75%, the lowest level since September 2022. Some analysts pointed out that Canada should have paused the rate cut cycle if there were no trade conflicts
In the face of uncertainty regarding the trade conflict between the U.S. and Canada, the Bank of Canada may be forced to adopt a more accommodative monetary policy to mitigate economic shocks.
Markets and economists widely expect the Bank of Canada to conduct its seventh interest rate cut of the year today, lowering the policy rate to 2.75%, the lowest level since September 2022.
Notably, some analysts have pointed out that without the trade conflict, Canada should have paused its rate-cutting cycle, especially given the strong performance of Canadian economic data and signs of intensifying core inflation. The market anticipates that the Bank of Canada will lower rates to 2% this year, below the so-called neutral range, but inflation shocks potentially triggered by tariffs will limit the central bank's policy space.
On Monday, the U.S. dollar rose 0.15% against the Canadian dollar to 1.4457, having briefly touched a low of 1.4440 since last Wednesday, amid growing concerns about the Canadian economic outlook.
The Shadow of Trade Conflict Looms Over Economic Outlook
According to Xinhua News Agency, U.S. President Trump stated on social media on the 11th that he would impose a 25% tariff on steel and aluminum products imported from Canada, raising the total tax rate to 50%. The relevant measures will take effect on March 12. Previously, Trump announced a 25% tariff on Canada and Mexico, which took effect on March 4.
A series of tariff measures have already had a severe impact on the Canadian economy. Economists cited by Bloomberg estimate:
"The U.S. tariffs on Canada and Canada's countermeasures will reduce Canada's GDP growth rate by 2 to 4 percentage points."
Last month, Bank of Canada Governor Tiff Macklem warned in a speech that ongoing trade disputes will erase economic growth, cutting Canadian output by nearly 3% over two years.
Faced with the risk of trade conflict, the central bank has no choice but to focus on alleviating the pain caused by economic shocks. Macklem has stated that monetary policy cannot repair the damage caused by trade conflicts, but the central bank can support domestic demand and smooth the adjustment process. Avery Shenfeld, Chief Economist at Canadian Imperial Bank of Commerce, stated:
"The central bank's job is to look beyond a month or two. It cannot restart a closed factory with a few rate cuts, but it can support domestic demand as compensation."