Posthaste: Bank of Canada would freeze rate cuts on Trump blanket 25% tariffs, economists say

The Bank of Canada will halt rate cuts after a March trim if United States President Donald Trump imposes 25 per cent tariffs on most goods from Canada, say economists at Oxford Economics Group Ltd., a decision that would upend standard thought about how policymakers respond to such traumatic events.

“Rather than cutting them, we think they would actually hold the policy rate steady at 2.75 per cent, so we think we get one more cut in March, and they would hold,” Michael Davenport, senior Canada economist at Oxford Economics, said during a webinar on Canada’s economy on Thursday.

That may seem counterintuitive, especially since there’s no shortage of economists predicting the Bank of Canada will or should take an axe to rates should Trump follow through on his tariff threat.

Davenport thinks policymakers will be focused on trying to balance the risks between inflation and growth.

“Ultimately, (policymakers) have stressed that they cannot use their sole policy tool to address higher inflation from tariffs and lower a big negative hit to economics from tariffs,” he said, adding that they will worry that inflation could surge if rates come down too low because tariffs will cause supply chain issues.

A weaker Canadian dollar from lower rates could also spur inflation on a wider exchange rate for goods.

The Bank of Canada will likely look to government fiscal policy to do the heavy lifting, Davenport and Tony Stillo, director of Canada Economics at Oxford, said.

“We think the Bank of Canada, coming out of this most recent period of high inflation and supply chain issues, will be very cautious to cut rates aggressively in the event of substantial tariffs,” Davenport said.

The economists think targeted tariffs on sectors,