MNI BOC WATCH: Investors Split On Hold Or Cut Amid US Tariffs

Investors are almost evenly divided on whether the Bank of Canada will lower interest rates Wednesday for the eighth time since June, as they weigh the inflationary impact of U.S. President Donald Trump's tariff policies versus their likely drag on growth.

Eleven economists surveyed by MNI see an unchanged 2.75% rate at the April 16 decision versus ten calling for a hold. About a dozen economists with a firm view are split between the need for two or three reductions by yearend. Several forecasters have changed their calls in recent days citing shifting U.S. policies.

Markets remain convinced the central bank will deliver two or three more cuts later this year.

Governor Tiff Macklem has said the trade war is a crisis meaning officials can't offer as much forward guidance. Instead, they must minimize competing trade risks rather than tackling the most likely scenario and prepare to move nimbly once things become clearer, he said. Minutes from the last meeting showed without a trade war officials likely would have supported holding rates. (See: MNI INTERVIEW: BOC To Hold As Tariff Doom Avoided-Ex Govt Econ)

“Absent a worse outcome on tariffs or another negative shock, the Bank will wait for the incoming data to chart the path forward for policy. We continue to expect another 75 bps in cuts this year, but the timing and pace will be data-driven,” BMO’s Benjamin Reitzes wrote in a research note.

While headline inflation has settled around 2% core indexes remain elevated, and the Bank's quarterly survey published last week showed Canadians saw both early signs of inflation and bigger recession odds. While the U.S. left Canada out of its sweeping global tariffs there is pain from automakers and lumber mills facing earlier penalties. 

MORE THAN TARIFFS

In recent weeks economists at BMO, TD, National Bank, and Desjardins have penciled in back-to-back quarters of negative GDP growth later this year.

The Bank says it's imperative to keep inflation expectations in check as tariffs boost prices, and that may limit the scope of potential relief. Tariff damage could also create enough slack to keep inflation in check, with one Bank staff scenario saying a bad trade war could “wipe out” growth for two years with exports falling 8.5% and investment 12% in the first year. 

Canada sends three-quarters of its exports to the U.S. and those suppliers account for one in ten jobs. Business confidence last month dropped farther and faster in response to the U.S. tariff war than during the Covid pandemic, the global financial crisis or 9-11 terrorist attacks. Firms also saw the dispute pushing expected price increases towards 4%.

While Macklem led the G7 with rate cuts from 5% starting in June, the current rate is about what officials see as neutral, which is why economists see the need for more cuts. Unemployment has drifted towards a post-pandemic high, though the BOC does not have a dual mandate like the Fed's. 

It's not just monetary policy clouding the outlook. Federal leaders including Prime Minister and former BOC Governor Mark Carney are making un-costed promises of tariff relief. Some consumers are also being hit with expensive mortgage re-financings, and the government is slowing immigration and that will curb potential economic growth.