A minute after midnight on Tuesday morning, US President Donald Trump made good on his tariff threat and a 25% levy on goods imported from Canada went into effect, as did a 10% tariff on energy products like oil and electricity, and critical minerals like aluminum. In tandem, a 25% retaliatory tariff went into effect on a laundry list of items imported from the US into Canada.
And now comes the fallout.
Already, economists with BMO have revised their interest rate forecast to reflect the impacts of a North American trade war, and are calling for quarter-point cuts at the Bank of Canada’s next four meetings, which would bring the policy rate down to 2% by July.
“The net risk is that we eventually go even lower, if the Bank is comfortable with the prevailing inflation backdrop later this year,” wrote BMO Economist Douglas Porter in a report put out Tuesday morning.
Before today, BMO was forecasting that the central bank would lower the policy rate two more times, in April and July, landing at 2.50%. Currently, the rate sits at 3%, which is the result of six consecutive cuts delivered between June 2024 and January 2025.
“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 said.
BMO’s stance is that if tariffs remain in place for one year, the economy could face a moderate recession, with real GDP potentially reduced to around 0.5% in 2025 amid disrupted supply chain and heightened uncertainty. On CPI, the bank is calling for a modest rise of less than one percentage point from the current 1.9% (as of January).
Circling back to the BoC’s next moves, Porter forecasts “a measure of caution in the policy easing, with inflationary pressures simultaneously prodded by retaliatory tariffs and Canadian dollar depreciation.”
Meanwhile, economists with BMO are expecting the US Federal Reserve to stay on the sidelines until September, at which point they are anticipating a cut of 25 basis points — “albeit with risks of an earlier move should the economy lose more momentum,” according to Porter.
“This means Canada-US overnight rate spreads are going to widen even further, testing the -225 bps level,” he said.
Although it doesn’t appear they have done so yet, economists with the rest of Canada’s ‘Big Five’ banks are expected to revise their interest rate forecasts in response to tariffs as well. RBC Economist Frances Donald did touch on the topic in a note today, but only to say that they “expect that the longer tariffs remain in play, the greater the likelihood that rates fall faster and by a larger magnitude.”
For the next BoC interest rate announcement, slated for March 12, all signs are pointing to another quarter-point cut, which would bring the policy rate down to 2.75%, the lowest its been since the early days of September 2022.
Scotiabank Economist Derek Holt wrote in a publication from Tuesday morning that the central bank “is likely to cut next week as tariffs tip the balance in that direction,” while TD Economist Rishi Sondhi said in February 28 report that the onset of a Canada-US trade war will “virtually lock in another cut.”
For his part, Holt continues to warn that Canadian counter-measures stand to eventually lift inflation enough to coax the Bank to opt for further policy tightening down the line.
