Trump tariff threat looms over interest rate path in 2025

financialpost.com:

Most economists a month ago likely would have told you that Canadian interest rates would steadily decline during the first half of 2025 before stabilizing in the third quarter.

But that was before United States president-elect Donald Trump introduced the threat of a 25 per cent tariff on all Canadian imports, a “major new uncertainty” that even Bank of Canada governor Tiff Macklem said is clouding policymakers’ outlook.

“They’ll have to be … humble and nimble,” Jimmy Jean, chief economist at Desjardins Group, said, echoing a favourite refrain of U.S. Federal Reserve chair Jerome Powell.

Given the range of projections for 2025, central bank watchers in Canada may want to heed that advice as well.

On the hawkish side, the Bank of Nova Scotia has the Bank of Canada cutting the policy rate by 25 basis points in the first quarter to three per cent, and then holding it there for the rest of the year.

But Royal Bank of Canada has the rate falling to two per cent before the end of next year. Chief economist Francis Donald said the Canadian economy has lost momentum, so rates need to move into stimulative territory and not remain in the Bank of Canada’s neutral range of 2.25 per cent to 3.25 per cent.

“The job market continues to weaken, the unemployment rate will rise, most levels of activity from businesses to households are soft and momentum is weak,” she said. “Our call for two per cent is both a call on where we think we have to drive through neutral, and it’s also a call on the fact that we think this economy needs more support.”

Toronto-Dominion Bank (TD) lands in the middle, predicting the overnight rate will fall to 2.25 per cent by the end of 2025.

“I’ve been calling this the ‘entering the probing phase’ to figure out