Seventh Consecutive BoC Rate Cut: Responding to Trade Uncertainty

On March 12, 2025, the Bank of Canada reduced its target rate by 25 basis points to 2.75%, in line with market expectations. This marks the seventh consecutive rate cut as the BoC responds to escalating trade tensions and their impact on business investment and consumer sentiment. The BoC noted that while inflation remains stable, uncertainty related to trade tensions has weighed on business investment and consumer confidence, contributing to the decision to lower rates.

Since March 4, the U.S. has imposed 25% tariffs on a broad range of Canadian imports, initially exempting steel, aluminum, and energy. However, recent expansions to the tariff list now include steel and aluminum, while Canadian energy exports - specifically crude oil and natural gas - are subject to a separate 10% duty. Goods compliant with the Canada-United States-Mexico Agreement (CUSMA) remain exempt to avoid direct violations of the trade pact.

In response, Canada introduced its own countermeasures, initially imposing 25% tariffs on $30 billion worth of U.S. goods, targeting agricultural products, machinery, and consumer goods. The scope of these measures has since expanded to include steel and aluminum, bringing the total value of affected U.S. exports to $125 billion. Additionally, individual provinces have taken further action. Ontario, for example, implemented a 25% surcharge on electricity exports to U.S. states such as New York, Michigan, and Minnesota. As both countries continue to adjust their trade policies, the situation remains fluid, with the potential for further escalations.

Merchandise exports and imports - Source: Statistics Canada

The trade dispute has already begun to weigh on the Canadian economy. The Bank of Canada noted a decline in business investment, particularly in manufacturing sectors directly affected by tariffs. Consumer confidence has also weakened, contributing to softer household spending. While inflation remains near the BoC’s 2% target, rising costs for imported goods could create upward pressure in the months ahead.

Source: Bank of Canada - Monetary Policy Report

Recent economic indicators highlight the growing pressures on Canada’s economy. While GDP grew by 2.6% in the fourth quarter of 2024, surpassing the 2.2% growth in the previous quarter, employment growth, which had strengthened from November through January, stalled in February, with the unemployment rate holding at 6.6%. This stagnation suggests that heightened trade tensions may be disrupting the labour market recovery. Inflation remains close to the Bank's 2% target, with January's Consumer Price Index slightly firmer than expected at 1.9%. However, short-term inflation expectations have risen due to concerns about the impact of tariffs on prices.

Looking ahead, the BoC projects modest economic growth, contingent upon the resolution of trade disputes and stabilization of global markets. The central bank remains committed to its inflation-targeting framework, ready to adjust monetary policy as necessary to support economic activity and maintain price stability. As of today, market participants assign a 44.0% probability to an additional 25 basis point rate cut at the BoC's next meeting on April 16, reflecting prevailing uncertainty and the central bank's data-dependent approach.

World Interest Rate Probability - Source: Bloomberg - March 12, 2025

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