Growing recession risks to Canada from the U.S.-led trade war will push the Bank of Canada to cut interest rates at least twice more this year, some economists predict, although a majority of economists said policymakers will leave them unchanged on Wednesday.
U.S. President Donald Trump’s surprise announcement last week to put a 90-day pause on so-called reciprocal tariffs, except for China, did little to alter pessimism around Canada’s economic prospects as U.S. levies on autos, steel and aluminum remain in place.
Unpredictable U.S. trade policy alongside Trump’s increasingly severe dispute with No. 2 economy China has raised the chances of a global economic downturn and Canada is likely to suffer, given around 80 per cent of its exports go to the U.S.
Economists in the April 7-11 Reuters poll, taken amid the tariff policy uncertainty, now expect the Canadian economy to grow 1.2 per cent and 1.1 per cent this year and next, respectively, down significantly from 1.7 per cent and 1.6 per cent predicted a month ago. A handful also forecast the economy to fall into recession this year.
“We look for the BoC to pause at 2.75 per cent in April as it waits for more clarity around tariff impacts before easing further,” said Andrew Kelvin, head of Canadian and global rates strategy at TD Securities.
“Trade policies in place are sufficient to subtract about a percentage point from Canadian growth,” Kelvin said. “As a slowdown in growth begins to take hold, we expect the BoC to resume easing.”
The trade war between the U.S. and China — with tariffs of up to 145 per cent — is expected to hike prices around the world, and Canada won’t be immune.
Just over 60 per cent of economists, 18 of 29, expected the Bank to keep its overnight rate steady on April 16 at 2.75 per cent. The other 11 predicted a 25 basis point reduction.
However, just over half of economists, 15 of 29, predicted two more rate cuts by the end of the third quarter as recession fears rise. That will take the rate to 2.25 per cent, the lower end of the Bank’s 2.25 per cent to 3.25 per cent range for a “neutral” rate that neither stimulates nor restricts growth.
There was no clear majority among economists where rates would be by year-end. Interest rate futures are currently pricing around 40 basis points of reductions this year.
Recession risk high
Recent weakness in the labour market and worsening business and consumer sentiment has already raised the alarm, and all but one of 15 economists who answered an additional question said the risk of a recession this year was high.
The Bank of Canada cut its key rate for a seventh consecutive time last month, to 2.75 per cent, marking a total of 225 basis points of reductions since early June.
But the recent surge in inflation, which hit an eight-month high of 2.6 per cent in February, far above the mid-point of the Bank of Canada’s target range of one to three per cent, puts the central bank in a difficult spot.
All 16 economists said U.S. tariffs had negatively impacted business sentiment, with over 60 per cent saying it was “very negative.”
Inflation is predicted to average 2.4 per cent and 2.1 per cent in 2025 and 2026, respectively, compared to 2.2 per cent and 2.1 per cent predicted in March.
