TD Economics suggests that the Bank of Canada may continue lowering interest rates due to ongoing trade uncertainties, reports BNN Bloomberg.
The Bank of Canada appears unlikely to pause its rate-cutting efforts, according to a report from TD Economics, as trade tensions fuelled by policy shifts under U.S. President-elect Donald Trump could weigh heavily on Canada’s economic outlook.
Trump recently announced plans for steep tariffs—25% on all goods from Canada and Mexico, and an additional 10% on imports from China. These tariffs, if implemented, could significantly disrupt Canada’s economy, putting additional pressure on the central bank to ease monetary policy further.
Over the summer, the Bank of Canada reduced interest rates by 25 basis points on three occasions, followed by a more substantial 50-basis-point cut in October. With another possible 50-point reduction expected in December, TD Economics suggests that the rate-cutting cycle may continue as the economic landscape remains uncertain.
The TD report also highlights a growing gap between Canada’s policy rate and that of the U.S. Federal Reserve, currently set at 100 basis points. This divergence is expected to suppress the Canadian dollar, particularly as trade negotiations unfold. If Trump’s tariff threats materialize, the Canadian dollar could dip below 70 cents U.S., a level not seen in two decades.
Inflation, which remains steady at the Bank of Canada’s 2% target, is another critical factor. However, TD Economics warns that rising trade risks and a potential slowdown in population growth could hinder economic momentum. This outlook may explain why the Ontario and federal governments recently introduced measures to bolster consumer confidence. These include rebate cheques and temporary tax cuts aimed at easing financial pressures on households.
Prime Minister Justin Trudeau’s recent announcement to remove the goods and services tax (GST) from certain items for two months starting December 14 reflects a strategy to improve affordability. Additionally, the federal government will distribute $250 cheques next spring to Canadians earning up to $150,000 annually.
TD Economics predicts that these government interventions might reduce the need for further aggressive rate cuts. While their forecast initially included a quarter-point cut, they now expect the Bank of Canada’s policy rate to stabilize at 2.5% by late 2025. However, the economists acknowledge that spending patterns influenced by rebates and a resolution to trade tensions could lead to a revision of this outlook.
The report underscores the delicate balancing act facing policymakers. With economic risks mounting and trade policies in flux, the Bank of Canada must navigate carefully to support growth without exacerbating potential financial vulnerabilities.
