BoC likely to cut rates 25 bps to cushion economy from US tariffs

The Bank of Canada (BoC) will likely cut its benchmark rate by a quarter point on Wednesday to cushion the economy against US tariffs, several economists said.

If the BoC delivers the 25-basis-point cut, it will be the bank’s seventh consecutive reduction, bringing down the policy rate to 2.75 per cent, a massive 225-bps drop from nine months ago.

“The bank governor will err on the side of supporting the economy during what could be a downtrend from the tariffs,” said Tony Stillo, director at forecasting and analysis group Oxford Economics.

US President Donald Trump’s abrupt shifts on the timing, products involved and extent of tariffs on imports from Canada have already created uncertainty among businesses and households, hurting investment and spending.

The potential impact of retaliation from Canada has heightened the unpredictability further.

BoC Governor Tiff Macklem is “in a bind,” Stillo said about Canada’s monetary policy path.

Cutting once in March and then holding rates to let the tariffs’ impact play out would be a pragmatic approach, he added.

Currency markets are seeing an almost 95 per cent chance of a 25-bps cut on Wednesday, and 20 economists out of 23 polled by Reuters expect the quarter-point reduction.

The bank will announce the rates at 9:45 am EDT (1345 GMT) on Wednesday.

The BoC said in January that tariff threats were clouding its forecasts. It said that if tariffs persist, it would shave off all the growth expected this year and next.

Canada’s economy had found its footing after several quarters of sluggishness. Fourth-quarter GDP surpassed forecasts to clock annualized growth of 2.6 per cent, inflation continued to be below 2 per cent and unemployment fell.

“A strong fourth quarter gives us a little bit of an insurance policy against these impending tariffs,” said Andrew DiCapua, principal economist at the Canadian Chamber of Commerce.

He cautioned, however, it would not offset a substantial blow from tariffs and the bank would have to bring the interest rate close to neutral soon.

A neutral rate is when the interest rate is just enough not to stimulate or restrict growth, a level the BoC considers roughly between 2.25 per cent and 3.25 per cent.

President Donald Trump’s increased tariffs on all US steel and aluminium imports took effect on Wednesday, stepping up a campaign to reorder global trade in favor of the US and drawing swift retaliation from Europe.

Trump’s action to bulk up protections for American steel and aluminium producers restores effective global tariffs of 25 per cent on all imports of the metals and extends the duties to hundreds of downstream products made from the metals, from nuts and bolts to bulldozer blades and soda cans.

Trump’s hyper-focus on tariffs since taking office in January has rattled investor, consumer and business confidence in ways that economists worry could cause a US recession and further lag on the global economy.

The European Commission, the executive arm of the European Union charged with coordinating trade matters, responded swiftly, saying it would impose counter tariffs on 26 billion euros ($28 billion) worth of US goods from next month.

“We are ready to engage in meaningful dialogue,” Commission President Ursula von der Leyen told reporters, adding she had tasked Trade Commissioner Maros Sefcovic to resume his talks to “explore better solutions with the US.”

“We firmly believe that in a world fraught with geoeconomic and political uncertainties, it is not in our common interest to burden our economies with such tariffs.”

China’s foreign ministry said Beijing would take all necessary measures to safeguard its rights and interests, while Japan’s Chief Cabinet Secretary Yoshimasa Hayashi said the move could have a major impact on U.S.-Japan economic ties.

Close US allies Canada, Britain and Australia criticised the blanket tariffs, with Canada mulling reciprocal actions and Britain’s trade minister Jonathan Reynolds saying “all options were on the table” to respond in the national interest.

Australian Prime Minister Anthony Albanese said the move was “against the spirit of our two nations’ enduring friendship” but ruled out tit-for-tat duties.

“Tariffs and escalating trade tensions are a form of economic self-harm, and a recipe for slower growth and higher inflation,” he told reporters.

The countries most affected by the tariffs are Canada, the biggest foreign supplier of steel and aluminium to the US, Brazil, Mexico and South Korea, which all have enjoyed some level of exemptions or quotas.

Trump initially threatened Canada with doubling the duty to 50 per cent on its steel and aluminium exports to the US but backed off after Ontario province suspended a move to impose a 25 per cent surcharge on electricity exports to the states of Minnesota, Michigan and New York.