Bank of Canada Interest Rate Announcement (March 12, 2025)

Bank of Canada cuts again on tariff risks 

• The Bank of Canada (BoC) cut its policy rate by another 25 basis points today, to 2.75%. This is the seventh straight meeting that the bank cut rates. 
• The bank's outlook recognized that the "economy entered 2025 in a solid position, with inflation close to the 2% target and robust GDP growth." Yet, heightened trade uncertainty "will likely slow the pace of economic activity and increase inflationary pressures".
• The BoC also published an update on businesses' and households' reactions to the current trade conflict. It found that businesses are seeing orders and sales inquiries decline. This has many firms expecting to decrease hiring and investment. At the same time, consumers are pulling back on spending as fears of job losses and higher inflation mount. 
• Regarding the future path of policy, the statement reinforced that "Monetary policy cannot offset the impacts of a trade war", but that the BoC will be attuned to both the "downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs."

Key Implications

• The BoC is taking out insurance that tariffs will persist and put significant downward pressure on the Canadian economy. While recent strength in economic data would argue that the BoC could have elected to pause rate cuts, past outperformance won't matter much with the narrative now fully altered to incorporate a trade war. Our updated forecast will reflect a shallow recession under the assumption that Canadian exporters will face an effective tariff rate of 12.5% for at least the next six months. That's a massive overhaul from the past when it sat below 2%.
• As long as the pressure on tariffs remains in place, the BoC should keep its dovish bias. We have the overnight rate getting to 2.25% by June, but see limitations in going further due to the delicate balance in managing inflation expectations.

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