MNI INTERVIEW: BOC To Slash Rates If Trump Forces Tariffs
MNI (OTTAWA) - The Bank of Canada will keep slashing interest rates if Donald Trump pushes through with threats to use "economic force" such as a 25% tariff against Canada, according to Brett House, a former IMF economist now at Columbia Business School.
“Across-the-board 25% tariffs would I think bring forward more substantial cuts. So rather than stepping down to 25 bp increments, we would see bigger cuts in the first few meetings of 2025," said House, a Toronto native and a member of several Canadian economic think tanks. (See: MNI INTERVIEW: BOC Faces Recessionary Risk On Tariff Hit: Lane)
Governor Tiff Macklem cut rates 50bps for the second straight meeting on Dec. 11 to 3.25% and said the pace would likely slow as inflation settled on target and economic growth projected to quicken. In response to questions about Trump's Nov. 25 threat to slap 25% tariffs on goods from Canada and Mexico, Macklem said he could only react to policies after implementation.
Economists agreed and over the holidays penciled in quarter-point cuts, but that view is being shaken by Trump's comments he wants to make Canada the 51st U.S. state. The president-elect went further Tuesday saying he will use "economic force" if needed and has denied reports about watering down trade penalties. The U.S. has no need to buy Canadian products such as autos and lumber, he added. (See: MNI INTERVIEW: Trump Tariffs Will Decimate Canadian Loggers)
TOUGH LOVE
House said tougher scenario for the BOC means "we would likely see the overnight target rate taken lower than 2.75% to 2.5% currently that’s bid by investment markets, I think we would see it go as low as 2% or even lower.” Canada's dollar has recently traded at the weakest since 2016 against the greenback on the view of a weaker economy and political risk.
The Bank's next rate meeting is Jan. 29, not long after Trump's Jan. 20 swearing-in.
Canada is in a more difficult negotiating position than in Trump's first term when he imposed then lifted tariffs, House said. Political disarray peaked Monday when Prime Minister Justin Trudeau said he will step down March 24 but in any case there has been a far less unified message about the pain Americans will feel from tariffs, House said. (See: MNI INTERVIEW: Trudeau Cabinet Disarray Fuels Trump Trade Risk)
Ontario's premier has threatened to cut off U.S. electricity flows while Quebec's leader has said a trade war is too damaging to risk. British Columbia Premier David Eby told reporters Tuesday "given the state of the federal government currently, the leadership on this file has come from the premiers.”
CHILLIER INVESTMENT
On the American side Trump's new administration is being stocked with trade hawks and there are fewer guardrails, House said. “Trump will not be running again so is not constrained by an interest in being re-elected, and polarization in American politics has certainly intensified since then. So any consolation we might take from the gap between rhetoric and action we saw in the first Trump term is probably premature.”
Trump's hold over lawmakers is stronger than his first term when Canada's dollar-for-dollar retaliatory tariffs focused on high-profile items such as bourbon from Mitch McConnell's Kentucky led to a de-escalation. Canada appears poised to try that strategy again, House said.
"This time around, both the heads the Senate and the House owe their positions much more tightly to support from President elect Trump, and it's not at all clear that efforts to pressure them, independent of discussions with the White House, are going to have the same effect,” he said.
Americans are paying little attention to Trump’s views on Canada, one reason to think his threats are seeking leverage to force other changes, House said. That includes pressuring Canada to accelerate plans to reach its NATO target of spending 2% of GDP on defense or tighter border security, he said, though it could be some other goal Trump hasn’t spelled out. Chrystia Freeland, who quit as finance minister saying Canada wasn't taking Trump seriously enough, has said his moves seek to pull investment and jobs from Canada.
“That chilling effect on investment in Canada has already happened, and if anything, is simply intensifying now,” House said.