As reported by Bloomberg and other sources, two of Canada’s largest financial institutions, Bank of Montreal (BMO) and Royal Bank of Canada (RBC), have revised their forecasts, suggesting that interest rates may decrease faster and reach lower levels than initially expected due to the ongoing trade conflict with the United States.
Following U.S. President Donald Trump’s executive order imposing a 25% tariff on most Canadian imports, effective as of 12:01 AM EST on Tuesday, the financial markets were sent into turmoil. The tariffs, which will exclude energy products taxed at a reduced 10% rate, are expected to have significant repercussions on the Canadian economy.
As a result of the uncertainty caused by the tariffs, BMO adjusted its economic outlook, predicting a sharper reduction in interest rates. In a note published on Tuesday, BMO’s Chief Economist Douglas Porter stated that the Bank of Canada (BoC) could implement a series of quarter-point rate cuts in the coming months, bringing the rate down to 2%. He cautioned, however, that depending on inflation trends, the BoC could lower rates even further.
“We now look for the quarter-point pace to continue in each of the next four meetings until July, taking the rate to two per cent,” Porter explained, adding that the situation remains fluid as more details unfold regarding Canada’s fiscal response and any potential U.S. countermeasures.
Similarly, RBC’s economists, Frances Donald and Cynthia Leach, highlighted that the Bank of Canada’s response to the tariffs had been uncertain until now. RBC had originally anticipated gradual rate cuts to 2.25%, but with the tariffs now in place, they expect a faster and more significant reduction in rates if the trade dispute continues. They also noted that fiscal stimulus measures from the Canadian government would play a critical role in how the Bank of Canada navigates this economic challenge.
The RBC economists pointed out that a prolonged trade conflict would require a balanced fiscal response, with targeted support to mitigate the recession’s immediate impacts, while avoiding broad-based measures that could drive inflation and complicate the central bank’s efforts.
Porter from BMO also emphasized the importance of managing inflation amidst economic slowdown, noting that while the BoC will focus on mitigating the negative impacts of a potential recession, inflationary pressures could be exacerbated by retaliatory tariffs and the depreciation of the Canadian dollar.
The Bank of Canada is set to make its next policy decision on Wednesday, March 12, with markets closely watching for any further indications of how the central bank plans to address the evolving economic situation.
