Where Every Big Bank Stands On Wednesday's Interest Rate Announcement

It’s been a politically eventful month and a half since the last Bank of Canada (BoC) interest rate announcement in late January, which culminated in a quarter-point cut that brought the policy rate down to a tidy 3%. At that time, the central bank’s decision to cut was bolstered by the uncertainty surrounding US President Donald Trump’s threat of a 25% tariff on all Canadian goods — plus, a 10% tariff on energy products and critical minerals — set to go into effect on February 1st.

As we now know, Trump ended up postponing that measure until March 4, only to partially walk back on it days later after Canada retaliated with reciprocal tariffs on around $30-billion worth of American imports. April 2 is the new date to watch for the all-encompassing 25% tariff. And meanwhile, a separate 25% levy on steel and aluminum (imported to the US from any country) is still set to go into effect on March 12.

As we head into the next interest rate announcement, scheduled for the morning of Wednesday, March 12, there continues to be an overtone of uncertainty. Nonetheless, economists with Canada’s ‘Big Five’ banks are factoring tariffs and the dynamics of a trade war into their predictions and, at this stage, all are leaning towards a cut, which would bring the policy rate down to 2.75% and mark the seventh consecutive cut since June.

CIBC: “Even if it can’t help much, it couldn’t hurt”

Despite the fact that Trump opted to push his 25% tariff to April, CIBC Economist Avery Shenfeld said that “the trade war is still very much in play” and that “a one-month reprieve means little,” in a weekly commentary published Friday. “Exporters rushed to get their March shipments across the border ahead of time, leaving less export demand for the coming few weeks,” he added.

“Even if the 25% ‘fentanyl’ tariffs are dropped in April, and there’s been no guarantee of that, they’ll be replaced by ‘reciprocal tariffs’ that could still be quite elevated,” Shenfeld wrote. “The White House will be free to calculate Canada’s tariff and non-tariff barriers with the same degree of rigour that they applied in their assessment of Canada’s role in US fentanyl supply.”

Later in the note, Shenfeld warned that without a “truce” between Canada and the US in April, GDP, which has been presenting strong over the past few quarters, is expected to shrink in Q2-2024, while unemployment rises to “new cyclical highs” by spring. Bearing those risks in mind, economists with CIBC are calling for a cut of 25 basis points at this week’s BoC meeting.

“[The BoC] can’t reopen a shuttered factory with a few rate cuts, but it can support domestic demand as an offset,” Shenfeld said. “Indeed, the Governor, while noting that a structural hit to the economy isn’t something he can magically fix, did say that the Bank can help smooth the adjustment process. With only one tool at his disposal to ‘help’, that suggests that he’s on board with some further interest rate relief. Another quarter-point cut next week might be only chicken soup for the economy’s soul, but as they say, even if it can’t help much, it couldn’t hurt.”

The long-term forecast: The policy rate will be lowered to 2.25% by June and held at that level until the end of the year.

TD: “Insurance against trade war escalation”

The past month and change has seen US importers not only rush their shipments of Canadian goods across the border, but stockpile them, and this is particularly true of consumer goods, automotive goods, industrial machinery and equipment, and energy products. TD Economist Marc Ercolao explained in March 7 note that this will give Canada’s first-quarter GDP a boost.

However, any economic strength is expected to be short lived as the trade war deepens. As such, economists with TD are anticipating that the BoC will opt for a quarter-point cut as an “insurance against a trade war escalation, despite the domestic economy running at a decent clip,” according to Ercolao.

“Indeed, market pricing is aligned with our call, now predicting a 90% chance of a 25 bps rate cut, up from only 30% a couple weeks ago,” he said.

Strengthening the case for a cut is Statistics Canada’s latest labour force survey, released Friday, and that showed very little change in employment in February, with just 1,100 jobs added (compared to 76,000 added in January). In addition, the unemployment rate held steady at around 6%.

“The job market couldn't keep up its feverish pace over the last few months. Winter storms were likely the culprit, but deteriorating hiring sentiment given heighten policy/trade uncertainty may have also started to bleed into the data,” said Economist James Orlando in a separate commentary. “One month doesn't make a trend, but Canadians should be closely watching the labour market for signs of weakness in the months ahead. Luckily, the Canadian labour market came into the current tariff crisis on solid footing, which is important given the significant headwinds the economy is facing.”

The long-term forecast: The policy rate will be lowered to 2.25% by the second quarter and held at that level until the end of the year.

Scotiabank: “Tariff effect isn’t a slam-dunk for a cut”

Over at Scotiabank, the expectation based on markets is a quarter-point cut “with a neutral-hawkish bias,” according to a new report from Scotiabank Economist Derek Holt, who has historically been a contrarian when it comes to BoC, making a case for a pause while other big banks are making a case for a cut, and appears to be sticking to his norm.

“The BoC would hold if not for the imposition of tariffs, but even the tariff effect isn’t a slam-dunk for a cut or easing bias,” Holt said. “The language in the last communications combined with data since then bolstered the case for pausing after 200 bps of rate cuts down to the present 3% overnight rate. […] Core inflation has been persistently tracking toward the upper end of the BoC’s 1–3% policy target range when evaluated in m/m annualized terms. Inflation expectations continue to be well above the BoC’s 2% inflation target. GDP growth smashed expectations by coming in at 2.6% q/q SAAR in Q4.”

Where Holt really deviate from his peers’ is in his belief that the threat posed by tariffs “may be subsiding.”

“If all of the originally announced tariffs were to proceed then the large jump in the weighted average tariffs (13.2% total exports, 17.3% US) would be a serious blow to the Canadian economy. Canada’s announced retaliation compared to this original US threat falls short of being dollar-for-dollar in terms of the relative impact on imports and exports, and so the net effect of the bilateral tariffs would be a negative demand shock to Canada. This would motivate further BoC easing,” he explained.

“It seems, however, that most sectors of the economy are likely to escape US tariffs if they can prove to be CUSMA compliant. Over 40% of trade is already CUSMA-compliant and the sense is that the majority of the rest could quickly become CUSMA-compliant.”

According to Holt, the tariffs on steel, aluminum, and energy products are “likely to stick,” and there remains a threat of “reciprocal tariffs” from Trump on dairy and lumber. “The weighted average tariffs on Canadian exports would be very small overall if that’s all this boils down to,” he added.

The long-term forecast: The policy rate will be lowered to 2.75% this month and held at that level until the end of the year.

RBC: “A very close call”

Economists with RBC have tended to err dovish with respect to monetary policy, and it’s been a while since we’ve seen them call for anything other than an interest rate cut from the central bank. This time around, however, they appear to be firmly on the fence. “We expect the Bank of Canada interest rate decision on Wednesday will be a very close call as our base case forecast assumes it will forego a rate cut for the first time since April 2024, but US trade risks could still easily tilt odds towards a seventh consecutive cut,” said economists Nathan Janzen and Claire Fan in a March 7 report.

Janzen and Fan pointed out what other economists have: if not for trade risks, the BoC would have ample reason to hold the policy rate steady at 3%.

“Inflation has remained around the central bank’s 2% target, but would be higher without the federal sales tax holiday that lowered prices for items like restaurant dining. Q4 GDP growth surprised substantially on the upside,” they said. “There was some evidence of softening Canadian employment in trade sensitive sectors in February. But the unemployment rate is still below levels late last year, consistent with the view that the economy-wide production gap (the key driver of future inflation pressures in the BoC’s policy framework) had begun to narrow into 2025.”

At the same time, the report underscores that “trade risks are not going away” and “what US trade policy will look like week-by-week (or even hour-by-hour) is still highly uncertain” (which, in itself, poses a risk to the Canada’s economic health).

“Interest rates are still relatively high. At 3%, the overnight rate remains near the top of the 2.25% to 3.25% range that the BoC views as having a neutral impact on the economy. But Governor Macklem has also explicitly highlighted the limits of monetary policy as a tool to offset tariff shocks, and the BoC still needs to strike balance between supporting the economy through uncertainty while guarding against adding unnecessarily to future inflation,” Janzen and Fan went on to say.

In a separate report from March 4, RBC’s Frances Donald and Cynthia Leach commented on monetary policy in the longer term, saying that they “expect that the longer tariffs remain in play, the greater the likelihood that rates fall faster and by a larger magnitude.”

The long-term forecast: The policy rate will be lowered to 2.25% by the third quarter and held at that level until the end of the year.

BMO: “A measure of caution in the policy easing”

BMO was the only big bank to put out a revised interest forecast on March 4, in direct response to Trump's 25% tariff on Canadian goods going into effect. That revision called for quarter-point cuts at each of the BoC’s next four meetings — this week’s meeting included — which would bring the policy rate down to 2% by the July 30th meeting. Prior to Tuesday, BMO was forecasting that the central bank would lower the policy rate two more times, in April and July, which would land the policy rate at 2.50%.

BMO Economist Douglas Porter laid out the updated forecast in a report on Tuesday, and also said at the time that “the net risk is that we eventually go even lower, if the Bank comfortable with the prevailing inflation backdrop later this year.”

“The Bank of Canada’s rate cut in late January was partly portrayed as a risk management move compelled by the rising risk of US tariffs. With that risk now being realized, we reckon the Bank will lean against the expected significant economic slowdown and steeply escalating risk of recession along with associated disinflationary pressures,” Porter explained. “However, there will be a measure of caution in the policy easing, with inflationary pressures simultaneously prodded by retaliatory tariffs and Canadian dollar depreciation.”

More recently, Porter confirmed in a March 7 note that BMO is sticking to its forecast revisions, as set out in Tuesday's report. But GDP is another story.

“We have slashed our call for GDP through the rest of this year on the assumption that the tariffs will be fully reactivated on Canada on April 2,” wrote Porter. “Full disclosure, we would not normally adjust our forecast until the tariffs are locked in, but the much bigger surprise now would be if Canada were to be spared from the coming ‘reciprocal’ tariffs. As well, the President reaffirmed that 25% tariffs are coming next week on all steel and aluminum imports, and Canada is the number one international supplier of both metals, and by far on the latter.”

The long-term forecast: The policy rate will be lowered to 2.0% by July and could be lowered further pending the inflation backdrop.