The chief economist at Royal Bank of Canada said she expects the Bank of Canada to continue to bring borrowing costs down but says the potential impact of tariffs could influence the timing and size of rate cuts going forward.
The Bank of Canada moved to cut its key policy rate by 25 basis points on Wednesday to three per cent. The move marked the sixth consecutive rate cut from the central bank since June 2024, with two outsized cuts of 50 basis points in both December and October.
“The Bank of Canada will continue cutting interest rates, tariffs will just determine whether they’re faster and larger rate cuts than what we currently have penciled in,” Frances Donald, senior vice president chief economist at RBC, said in an interview with BNN Bloomberg Thursday.
Bank of Canada Governor Tiff Macklem said in his speech to reporters that a broad-based and protracted trade war would negatively impact the Canadian economy, putting upward pressure on inflation.
In a report Wednesday, Donald said that without any shocks to the economy, the Bank of Canada would likely be able to continue to gradually ease interest rates to two per cent by the end of the year. However, she added that the easing would be slower and in “smaller magnitudes” compared to 2024.
“But, the BoC isn’t facing standard run-of-the-mill uncertainty in its outlook,” the report said referencing the challenges of conducting monetary policy amid tariff threats.
Even the threat of tariffs can spur an uncertainty shock, Donald noted, adding that it weighs on business investment and creates inventory hoarding.
“We’ve already seen fourth quarter business outlook surveys that were talking about the uncertainty and that’s not the only uncertainty we have. We don’t know what the next government will look like in Canada or what their policies will look like as well,” she said.
“So, there’s a myriad of factors that are going to make it very difficult for businesses to make decisions in this type of environment and of course we’re going to see that in the data.”
last November, U.S. President Donald Trump initially threated to impose 25 per cent tariffs on all Canadian imports during his first day in office, which did not occur, but he has since floated the idea of levying tariffs on Feb. 1.
