Bank of Canada expected to cut interest rate on March 12

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

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The move would bring the policy rate to 2.75 per cent and mean a seventh consecutive cut to the central bank’s policy rate, which currently sits at three per cent, still near the top of the central bank’s neutral range of 2.25 to 3.25 per cent.

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“There’s no harm in getting back to the mid-point of that range,” said Jeremy Kronick, vice-president of economic analysis and strategy at the C.D. Howe Institute. “Certainly, with this much uncertainty, I think there is a lot of value in signalling that support.”

During the last rate announcement in January, Bank of Canada governor Tiff Macklem said policymakers will have to balance the impact a tariff shock, which could lead to weaker economic growth, but higher inflation.

Economists say recent data suggest there would have been a case made for the bank to hold its rate on Wednesday, absent any trade conflict. Canada’s economy finished stronger than expected in the fourth quarter of 2024, growing at an annual pace of 2.6 per cent. Core CPI inflation also showed an uptick in January, suggesting underlying inflation remains on the higher side of the central bank’s inflation control band.

Following Friday’s jobs report, which showed the Canadian economy added just 1,100 jobs in February, market bets for a March cut by the central bank went above 80 per cent. The unemployment rate held steady at 6.6 per cent during the month.

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“Unlike prior decisions though, easing will be less about absorbing already-accumulated economic slack and more about supporting an economy mired in trade conflict,” said National Bank of Canada economists Taylor Schleich, Warren Lovely and Ethan Currie, in a note.

Last Thursday U.S. President Donald Trump issued a one-month delay on his blanket 25 per cent tariffs for Canadian goods that are in compliance with the Canada-United States-Mexico Agreement (CUSMA). Currently, nearly 40 per cent of Canadian exports are compliant with the agreement.

In addition, Trump has promised to hit Canadian steel and aluminum exports with a 25 per cent levy on Wednesday, the same day the central bank is set to make its interest rate decision. Reciprocal tariffs are expected on April 2, which could include Canadian dairy and lumber.

The Bank of Canada estimates a full trade war with the U.S. would cut investment in Canada by 12 per cent and decrease Canadian exports by 8.5 per cent after the first year. Trade conflict could wipe out three per cent from Canada’s GDP over the next two years.

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“One thing you try to do as a central banker is you try to be forward looking,” said Kronick. “If it’s hard to predict where we’re going to be in 24 months in normal times, it’s even harder in the era we’re living in today.”

Macklem has said monetary policy cannot completely offset the impacts of a trade war with the U.S. Federal and provincial governments are expected to provide targeted supports to workers and businesses affected by the tariffs, with the central bank playing a supportive role in helping the economy adjust.

“The Bank of Canada will also need to consider any potential fiscal policy response, which is better able to provide targeted, timely support than changes in interest rates that impact economic conditions more broadly and only with substantial lags,” said Royal Bank of Canada economists Nathan Janzen and Claire Fan, in a note. “Interest rates are still relatively high.”

• Email: jgowling@postmedia.com

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