The Bank of Canada is likely to hold interest rates steady on Wednesday as officials take stock of the damage posed by U.S. President Donald Trump’s trade war.
Economists and markets largely expect policymakers led by Governor Tiff Macklem to keep the policy interest rate unchanged at 2.75 per cent, which would be the first pause in eight meetings. Still, most analysts see the decision as a close call — a slim majority, or 17 out of 30 economists in a Bloomberg survey, are expecting a hold.
Trump spared Canada from his now-delayed “reciprocal tariffs” earlier this month, but he has imposed levies on a variety of Canadian goods, including autos, steel and aluminum. Prime Minister Mark Carney has retaliated with 25 per cent import taxes on certain U.S. products, though he announced some exemptions on Tuesday.
The volatile and rapidly evolving tariff barrage has trashed business and consumer optimism. It’s prompted economists to slash growth forecasts and boost inflation estimates for the northern nation — a stagflationary outlook.
It’s also clouding the bank’s decision-making process. In a speech on March 20, before Trump’s “Liberation Day” tariff announcement sent markets into turmoil, Macklem said the central bank would be “less forward-looking than normal until the situation is clearer,” warning that it could be forced to act more quickly “when things crystallize.”
The same day, Macklem told reporters that policymakers may end up forgoing the more detailed economic and inflation projections that normally accompany the bank’s quarterly monetary policy reports. Instead, the bank may opt to offer a range of outcomes, as it did in April 2020, at the onset of the Covid-19 pandemic.
“As a result of the broad uncertainty, coupled with a better-than-feared outcome on Liberation Day, we do not expect the Bank of Canada to cut rates on Wednesday,” Ian Pollick, global head of fixed income, currency and commodities strategy for Canadian Imperial Bank of Commerce, said in an interview.
Another quarter-percentage point cut, while possible, may also be met with reluctance from at least some members of the governing council. A summary of officials’ deliberations showed policymakers debated a pause in March, with some suggesting waiting for more data before making further adjustments.
Officials have loosened monetary policy substantially since June, after making good progress on inflation relative to peer countries. At the same time, core measures are stuck near the top of the central bank’s target band.
Inflation unexpectedly cooled in March, Statistics Canada reported Tuesday. While the data initially pushed overnight swap markets to price equal chances of a pause and a cut on Wednesday, markets now put the odds of a hold at about two-thirds.
There are plenty of reasons to proceed carefully, including a U.S. trade policy that changes almost daily, roiling bond and equity markets which each new announcement.
Officials have warned that they can’t let the potential price shock of the trade war turn into a sustained increase in inflation, limiting their ability to cut interest rates to help sectors affected by the dispute. The bank’s own surveys have already started to show inflation expectations rising because of tariffs.
“In a financial crisis or pandemic, time is of the essence. However, in a trade war, things are slower moving,” Royce Mendes, head of rates and macro strategy at Desjardins Securities, wrote in a report to investors.
“Officials have the luxury of not being forced into a decision they may later regret.”
At the same time, the U.S. is the country’s largest trade partner, and weaker growth in America will eventually hit Canada hard if the global tariff war lasts.
“However, Canada has sufficient medicine in the form of fiscal stimulus at the federal and provincial levels, as well as ongoing easing from the Bank of Canada to help it mitigate symptoms and recover more quickly,” Royal Bank of Canada economists Claire Fan and Nathan Janzen wrote in a report.
The economists wrote that they expect a 25-basis-point cut Wednesday because the central bank signaled a willingness in its March decision to support the economy in anticipation of future softening.
One factor in favor of a pause: Canada is in the middle of an election campaign.
“I’m not usually a fan of including political considerations,” Eric Lascelles, chief economist of RBC Global Asset Management, said in an interview. But for central bank officials, “if you’re uncertain whether you should cut or not, perhaps you don’t want to make a splashy action a couple of weeks before an election,” he said.
--With assistance from Mario Baker Ramirez.
Erik Hertzberg, Bloomberg News
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