Bank of Canada to freeze rate cuts on 25% blanket tariffs

Article content

Article content

Article content

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.

Article content

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.

Article content

Article content

The economists think targeted tariffs on sectors, including metals, wood and agricultural products, will be the end result, not blanket tariffs.

“We don’t think they’re going to push the economy into a recession, but they are going to add further slack to the economy and require more interest rate support,” Davenport said.

Trump’s tariff pile-on has Stillo and Davenport calling for the Bank of Canada to cut interest rates by another 75 basis points — 25 basis points at each of the next three meetings — to 2.25 per cent, which is the bottom of the central bank’s neutral range for rates.

At that level, rates “will be slightly supportive of the economy,” Stillo said.

The economists expect rates to hold there until mid-2026 to help the Canadian economy unwind its output gap — it’s not producing as much as it could — and to support a “quite weak” labour market.

The coming wave of mortgage renewals also provides the Bank of Canada with more motivation to lower rates, Stillo said.

But come mid-2026, the calculus changes.

Stillo and Davenport expect that tariffs will have come off by then as the United States-Mexico-Canada Agreement is renegotiated, providing a boost to growth. They also expect it will also help close the output gap.

Article content

The economists further predict strains will begin to show in the labour market as a falling population shrinks the number of workers available and starts to put upward pressure on wages.

“That will get the Bank of Canada a little bit more concerned that rates don’t need to be low for longer, that they can raise rates back to what we think is the ultimate neutral level of 2.75 per cent,” they said.

 Sign up here to get Posthaste delivered straight to your inbox.

Canada fares the best if United States President Donald Trump ends up imposing reciprocal tariffs, according to a new report by Yale University.

The university’s Budget Lab estimated tariff rates on Canada would increase by 4.59 percentage points, which would be the smallest among the 20 countries studied.

Other G7 members fare worse, with Japan’s tariff rate rising by 10.9 percentage points, France’s by 18.9 percentage points, Germany’s by 19 percentage points, Great Britain’s by 19.9 percentage points and Italy’s by 23.2 percentage points.

Mexico, the third partner in the United States-Mexico-Canada Agreement (USMCA), would have tariffs rise by 16.3 percentage points. — Gigi Suhanic, Financial Post

Article content

Find out more here.

• Today’s Data: Statistics Canada report fourth quarter GDP
  
• Earnings: Laurentian Bank of Canada
  

---

---

Tax season is now underway, and if you moved in 2024, you may be entitled to write off your moving expenses, assuming you qualify. Not all moves, however, qualify as an “eligible relocation,” and the ability to deduct moving expenses can be challenged by the taxman, which is what happened in a recent case decided earlier this month. Read more here.

---

Calling Canadian families with younger kids or teens: Whether it’s budgeting, spending, investing, paying off debt, or just paying the bills, does your family have any financial resolutions for the coming year? Let us know at wealth@postmedia.com.

---

McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Article content

Financial Post on YouTube

Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Gigi Suhanic with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here

Article content