More rate cuts could be ahead if trade war erupts, says BMO's Porter
The Bank of Canada reduced interest rates for the sixth time in a row on Wednesday – and further cuts could be on the way if potential US tariffs start to weigh against the Canadian economy, according to Bank of Montreal (BMO) chief economist Doug Porter.
The central bank lowered its benchmark rate to 3.0% with its first decision of 2025 in a move that arrived just days before February 1, the date US president Donald Trump has proposed for the beginning of levies on Canadian goods crossing the border southwards.
In remarks after the announcement, Bank governor Tiff Macklem described tariffs as a “major uncertainty” and said a trade war with the US could put upward pressure on inflation in Canada.
Still, Porter said his and BMO’s view is that the mooted tariffs, which Trump has claimed could amount to a blanket 25% charge on all imports to the US from Canada, would be a bigger threat to Canadian economic growth than to inflation.
“I’m not convinced that the Canadian government is going to respond dollar for dollar on retaliation. I think they’re going to be much more careful on that front, and I think they’re going to try to do as little damage to the Canadian consumer as possible,” he told Canadian Mortgage Professional.
“But if we’re in a world where we’re not completely retaliating, it’s not clear that producers are going to be able to pass on a lot of price increases here in this country – especially if the economy is hobbled by US tariffs. So our view is that while the Bank might not respond immediately, ultimately they’re going to be cutting more if we’re in a world of tariffs.”
How likely are US tariffs on Canada?
The Bank’s statement on Wednesday highlighted that the length and intensity of a possible trade war remain impossible to predict, although Trump’s tariff threats featured prominently in its assessment of the economic landscape facing Canada.
Porter said he views a “fairly high” probability that the US will introduce tariffs, even though nothing can be taken for definite under a notoriously unpredictable president. There’s still a reasonable chance of no punitive action by the US at all, he added, although a best guess might be for levies of about 5% to 10% on Canadian goods.
“That’s pretty serious, but I think that’s kind of manageable,” he said. “That’s why we’re not significantly changing our forecast just yet either for the economy or on interest rates.”
Tariff threats an unanticipated curveball for the Bank of Canada
This week’s cut means the Bank has now slashed its overnight rate by a full two percentage points since last June, down from its highest level in 23 years. Inflation has hovered steadily within its target range for a prolonged spell, falling significantly from a four-decade high of 8.1% in the middle of 2022, while the labour market has softened and unemployment is on the up.
GDP growth will still strengthen this year, the Bank said, although the federal government’s reduced immigration targets mean it will probably prove weaker than originally expected in October and the impact of possible tariffs remains to be seen.
Trump’s tariff threats arrived unexpectedly in November, with the then-candidate making no mention of those measures during his presidential campaign but introducing the proposals within weeks of winning the election.
They’ve complicated what was becoming a brightening picture for the Bank of Canada in the second half of 2024, according to Porter.
“[The Bank] grappled inflation to what they want it to look like. The sun was beginning to shine again on the Canadian consumer,” he said. “We were actually getting much more upbeat on the Canadian economy.
“It really did look like the consumer and the housing market were rounding into better shape and now we face this new risk out of it – which really developed out of the clear blue sky.”
Source CMP
By Fergal McAlinden
