Banking giant calls for emergency BoC rate cut

National Bank of Canada economists say there is a “strong argument” for Canada’s central bank to make an emergency interest rate cut to offset the effect of the bombshell tariffs announced by US president Donald Trump on Saturday.  

The bank’s chief economist Stéfane Marion and team wrote in a note on Monday morning that the Bank of Canada, which isn’t scheduled to meet again on interest rates until March, could slash its policy rate before then to help the economy absorb the impact of a trade war.  

“Note that an emergency action would argue for a larger-than-normal cut of at least 50 bps,” they wrote, also calling for 25-basis-point cuts in March and April to bring the benchmark rate – which leads variable interest rates in Canada – down to 2% by the spring.  

The White House announced on Saturday that the US was pushing ahead with its threatened tariffs, coming into effect tomorrow (February 4), with Canadian imports facing 25% duties excluding energy products, which have been tariffed at 10%. Canada retaliated by slapping 25% tariffs on US goods worth an estimated $155 billion.  

Marion said Trump’s measures likely marked a strategic move to ramp up pressure on trading partners to tighten border security. “Once progress is recognized, we expect tariffs to be reduced but not eliminated,” he said. “Given the new administration’s protectionist stance, we anticipate that tariffs will settle at 10%, aligning with the lower bound imposed on Canadian energy goods.”  

Still, the tariffs’ effect on Canada’s economy is likely to be severe. National Bank is downgrading its forecast for 2025 GDP growth to 0.4%, down from 1.4%, with the unemployment rate projected to jump to an average of 7.4% this year.  

The trade war will probably raise import costs for Canadian buyers and hit the loonie, meaning headline inflation is likely to increase by 2.3% this year, National Bank said, up 0.1% from its previous assessment. 

As a small economy, Canada is “particularly vulnerable” to a trade war, according to Marion – but although the impact is likely to be more severe on the northern side of the border, Canada “remains a vital part of the US economic strategy,” he said, “which supports the case for a more measured and less punitive tariff structure.”  

Source CMP
By Fergal McAlinden