MNI BOC WATCH: Slowing Pace Of Cuts While Bracing For Tariffs
MNI (OTTAWA) - Canada's central bank is expected to lower borrowing costs a quarter point Wednesday after two half-point reductions at the preceding two meetings, the kind of oversized stimulus that will likely be revisited if U.S. President Donald Trump follows with 25% tariffs the following week.
Governor Tiff Macklem is expected by 20 of 23 economists surveyed by MNI to lower the overnight policy rate to 3% in a decision due at 945am EST. The other three say a quarter point is an even bet with either a pause or a 50bp move.
Bank officials have said monetary policy won't anticipate any trade actions while acknowledging both the potential hit to growth and higher prices from tariffs. Canada is seeking exemptions and signaling dollar-for-dollar retaliation, while Trump pushed back an earlier pledge to impose penalties on his first day in office. Experts tell MNI the growth shock from tariffs would demand a return to a 50bps cut. (See: MNI INTERVIEW: BOC To Slash Rates If Trump Forces Tariffs)
With the trade outlook in question, forecasters have kept in place their view the economy is otherwise in a decent place and heeding Macklem's words about shifting to more considered easing. Inflation appears to be stabilizing at the 2% target and despite some weak growth late in 2024, rate cuts are boosting consumers. While unemployment has been rising on record immigration, the government is scaling back and some slack is helpful for the lingering hotspot of 4% wage gains.
THREATS AND PROMISES
The Bank's policy rate has moved from the highest in decades at 5% to the edge of what officials see as the neutral range of 2.25% to 3.25%. Economists see a base case for Macklem to cut towards the low end of neutral by around midyear. While that may widen the gap with the Fed's 4.25%-4.5% rate, Macklem has downplayed concern about a weak CAD and said he's nowhere near where the gap can go. The differential was as wide as 250bps in 1997.
"Monetary policy no longer needs to be clearly in restrictive territory. We want to see growth pick up to absorb the unused capacity in the economy to keep inflation close to 2%," Macklem said last month.
Besides the threat of a trade war with the buyer of three-quarters of Canada's exports, fiscal policy is in flux. Prime Minister Justin Trudeau is stepping down March 24 and the next Liberal leader may present a budget shortly after. Opposition parties pledge to force an election as soon as possible and polls show Conservatives are likely to take power, partly on promises to slim spending and deficits. (See: MNI: Trudeau Deficit Unlikely To Fix Canada's Vibecession)
Lurking in the background is a cohort of households due to reset five-year fixed mortgages at much higher rates because the original loans were made when the Bank's key rate was close to zero during the pandemic. That makes any further climb in unemployment more of a danger, and consumption is already seen as the key risk to the official forecast. Output per person has also fallen over most of the last two years and some economists say the long trend of mediocrity amounts to a hidden recession.
Trump tariffs may bring domestic weakness into the open. "Such a move would cause GDP to fall by somewhere in the region of 3%, triggering a recession. Even if he does not follow through, such threats are likely to weigh heavily on business confidence," Thomas Ryan of Capital Economics said in a research note. (See: MNI INTERVIEW: Canada Already Chilled By Trump Tariff Threat)