Bank of Canada Rate Cuts on the Horizon? How Tariffs Could Reshape Interest Rate Expectations

The Bank of Canada’s (BoC) interest rate path could see a significant shift in the coming days, depending on developments surrounding proposed tariffs. As financial markets weigh the likelihood of trade restrictions being imposed, delayed, or scrapped altogether, rate expectations are in flux.

Currently, optimism prevails in the market, but sentiment can pivot rapidly as new policy decisions unfold.

BoC Rate Cut Expectations: Where Do Things Stand?

The next BoC policy meeting is scheduled for March 12, 2025, and market probabilities indicate a strong expectation of monetary easing. As of now:

• 83% chance of a 25-basis-point rate cut in March
• 62.8 basis points (bps) of total easing projected by year-end, implying at least 2.5 rate cuts

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How Tariffs Could Reshape Rate Policy

The potential introduction of new tariffs has injected uncertainty into economic forecasts. If trade barriers materialize, they could trigger inflationary pressures while simultaneously weakening economic growth—two factors that would push the BoC toward an aggressive rate-cutting cycle.

Analysts at BMO have projected a dramatic shift in rate policy if tariffs go into effect:

• Six additional rate cuts expected by year-end
• The BoC’s benchmark rate could drop from 3.00% to 1.50%

Such an aggressive easing stance would reflect the central bank’s attempt to mitigate economic fallout from trade disruptions.

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Key Takeaways and Market Implications

• If tariffs are implemented, rate cuts could accelerate, bringing BoC policy closer to ultra-low levels seen in past downturns.
• If tariffs are delayed or scrapped, the BoC may opt for a more measured approach, gradually reducing rates over time.
• Investors and businesses should closely monitor developments, as shifting expectations around trade policy and rate cuts could impact borrowing costs, currency markets, and broader economic sentiment.

With just weeks until the next BoC meeting, all eyes remain on tariff decisions and their potential ripple effects across the Canadian economy. Market participants should brace for volatility as the central bank navigates an increasingly complex policy landscape.