Bank of Canada widely expected to cut interest rate as tariff threat looms

financialpost.com:

The Bank of Canada is expected to cut its policy rate by 25 basis points on Wednesday, amid widespread trade uncertainty with the United States.

The central bank’s interest rate currently sits at 3.25 per cent, the top-line of the bank’s neutral range. In December, Bank of Canada governor Tiff Macklem said policymakers would take a more “gradual approach” to reductions of the policy rate moving forward.

Economic data from December showed inflation dipping down to 1.8 per cent, thanks mainly to the GST/HST tax holiday introduced by the federal government. These temporary effects are expected to wear off when the measure ends mid-February, with core measures remaining more elevated the previous three months. Economic growth is tracking at 1.7 per cent for the final quarter of 2024, below the two per cent the central bank forecasted.

But Toronto-Dominion Bank deputy chief economist Derek Burleton thinks this week’s decision ultimately rests on mitigating risks associated with U.S. President Donald Trump‘s threat to impose 25-per-cent tariffs on Canadian goods as early as Feb. 1.

“Inflation’s remaining a little bit more persistent than expected, spending has been picking up, but I think ultimately the ‘Trump card’ is going to be the downside risk,” Burleton said.

Most economists believe a trade war with the U.S. would ultimately push Canada’s economy into a recession. The Bank of Canada had previously played out a scenario of 25-per-cent tariffs during Trump’s first administration. A monetary policy report from 2019, shows a 25-per-cent tariff would ultimately lead to a six per cent hit to Canada’s GDP. On Wednesday, the central bank is expected to provide updated forecasts, the first since Trump first levelled his recent