BoC now expected to slash rates further as trade crisis escalates

Banking giant revises forecast, predicts multiple cuts in 2025

The Bank of Canada is now likely to cut interest rates at each of its next four announcements as the Canadian economy reels from the impact of Donald Trump’s tariffs, according to Bank of Montreal (BMO).

The banking giant revised its forecast for the year ahead in light of Trump’s decision to push ahead with huge 25% levies on goods crossing the border southwards from Canada and a 10% charge on Canadian energy and minerals.

The central bank’s policy rate is now expected to land at 2% in July, BMO’s chief economist Doug Porter said on Tuesday, with consecutive quarter-point cuts expected in each of its next four meetings.

While the situation remains “fluid” with little clarity over how long Trump’s tariffs – which came into effect at 12:01 on Tuesday morning – will last, Porter highlighted their potentially devastating impact on Canadian growth.

“Trump’s tariff hammer will come down hard on Canada’s economy,” he wrote. “If the announced tariffs remain in place for one year, the economy would face the risk of a moderate recession. A couple of quarters of contraction are well within the realm of possibility.”

BMO now expects Canadian GDP growth to fall by about 1.5% in 2025 thanks to reduced demand for Canadian exports in the US and supply chain snarls as a result of the chaos.

A weakening economy and probable jump in employment to about 8% will weigh against inflation pressures, Porter added, with the economy expected to recover “modestly” in 2026 with the tariffs’ likely revocation.

Also on Tuesday, Royal Bank of Canada (RBC) chief executive officer Dave McKay said business activity was already slowing as a result of the tariffs but said the extent of their impact on the Canadian economy would depend on how long they stay in place.

With trade tensions rising, Canada’s top bank CEOs are pushing for policy changes to drive long-term growth. RBC’s Dave McKay calls it a “chance to boost productivity,” while National Bank’s Laurent Ferreira urges a “head of deregulation.”  https://t.co/21IvfxMhSJ

— Canadian Mortgage Professional Magazine (@CMPmagazine) March 3, 2025

Porter emphasized the Bank of Canada will take a cautious approach to the rate outlook with one eye on the inflation risk posed by countermeasures and a plunging loonie.

But the central bank could even decide to trim its key rate lower than 2%, he said, “if the Bank is comfortable with the prevailing inflation backdrop later this year.”

Source: Canadian Mortgage Professional