Traders expect lower interest rates as Canada prepares countermeasures against new US tariffs
Traders are adjusting their expectations for deeper rate cuts from the Bank of Canada as the country braces for potential economic fallout from a prolonged trade dispute with the US, according to BNN Bloomberg.
By Monday afternoon, traders in overnight swaps had placed more than a 20 percent chance that the central bank would cut interest rates by half a percentage point at its upcoming March 12 meeting.
Just days earlier, on January 30, markets had not even fully anticipated a quarter-point cut.
Market expectations now suggest that the Bank of Canada’s policy rate could drop to around 2.25 percent. This outlook has shifted from last week when traders did not foresee rates falling below 2.5 percent during this cycle.
Some analysts and economists are considering whether the central bank might move ahead with an emergency rate cut before March.
Such decisions are rare; the last instance occurred in March 2020 when the Bank of Canada responded to financial turmoil caused by the COVID-19 crisis.
At that time, economic losses and job cuts were projected to be severe. The current trade dispute presents different challenges, and the long-term impact remains unclear.
“An intermeeting cut would only be appropriate in response to significant financial market stresses, and would likely be accompanied by other measures needed to support markets,” said Andrew Kelvin, head of Canadian and global rates strategy at Toronto-Dominion Bank’s securities division.
The Bank of Canada had already reduced its benchmark overnight rate by a quarter percentage point to three percent last week.
Policymakers also withdrew any guidance on how they plan to adjust borrowing costs moving forward, citing uncertainty over a possible trade war.
The trade dispute escalated on Saturday when US President Donald Trump signed an order imposing 25 percent tariffs on most Canadian imports starting Tuesday, along with a 10 percent tariff on energy. In response, Canada announced its own tariffs on US goods.
However, most of these countermeasures will not take effect for three weeks, leaving room for negotiations.
Prime Minister Justin Trudeau has stated his support for countermeasures that match the dollar value of US tariffs.
However, Canada’s current plan targets $155bn in US-made goods, falling short of full parity. The measured response could help contain inflationary pressures linked to the trade conflict.
Bank of Canada Governor Tiff Macklem acknowledged in a Bloomberg interview last week that monetary policy cannot reverse the economic impact of a trade war.
However, he indicated that the central bank could play a role in helping businesses and markets adjust to changing conditions.
“We certainly don’t have all the answers, but where we can provide some analysis about what this could mean, I think we should do our best to get it out there,” Macklem said.
Kelvin noted that the federal government could introduce fiscal measures, such as increased spending or borrowing, to mitigate the impact on businesses and households.
“The bank needs to be careful not to overcommit. This is especially true, given that we don’t have any real sense of the scope of potential fiscal supports.”
