Bank of Canada cuts interest rate, calling trade war with U.S. ‘a new crisis’ and warning of ‘severe’ impact #CanadaFinance

Canada’s biggest banks reduced their prime rates Wednesday afternoon after the Bank of Canada cut its benchmark interest rate by an additional 25 basis points on Wednesday.

RBC, BMO, TD, CIBC and Scotiabank each lowered their prime rates by 25 basis points, from 5.2 per cent to 4.95 per cent. The new rates are effective March 13.

The prime rate is the annual interest rate that banks and financial institutions use to set interest rates for variable-rate mortgages, lines of credit, and some other loans.

In issuing its decision on Wednesday, Scotiabank head of Capital Markets Economics Derek Holt said the Bank of Canada struck “a neutral-hawkish policy bias”, with the bias tilting “a little more toward the hawkish side of things.”

“They are saying their principal focus will be upon ensuring that inflation and inflation expectations are well anchored,” Holt wrote in a research note on Wednesday.

He also highlighted the final paragraph of the central bank’s statement, which he said “ends with a neutral-hawkish spin” with the Bank saying the Governing Council “will also be closely monitoring inflation expectations.”

“In plain English, this is not committing to any path for the policy rate as they wish to see where the balance of risks ultimately lie in terms of their mandate to achieve 2 per cent inflation over the medium-term,” Holt said.

“They are being very clear that this will be their focus.”

RBC Royal Bank announced a decrease to its prime rate by 25 basis points following the Bank of Canada’s policy rate cut, bringing it to 4.95 per cent from 5.2 per cent. The new rate is effective March 13.

Canada’s other major banks are expected to follow suit this afternoon.

In a statement sent to Yahoo Finance Canada, Colin White, CEO of Verecan Capital Management, argues that the current trade climate’s effect on BoC policy should be limited.

“The tariff issue is moving too fast, too randomly for any kind of real policy reaction,” White says. “Having said that, the anxiety and chaos being created is real, and chaos can influence policy.”

With that in mind, White adds, any tariff component of the BoC’s policy response today is to “the chaotic effect of the rhetoric and not the tariffs themselves,” given that “the net long term effect of tariffs, should they persist… will be inflationary as they drive up the cost of producing goods.”

The real policy focus now, White says, should still be about “the boring stuff,” that is, economic data.

Bank of Canada Governor Tiff Macklem is among the pandemic-era central bankers facing criticism for dubbing the COVID-linked inflation spike “transitory,” suggesting at the time that rising prices may be short-lived. Of course, history shows inflation was sticker than expected.

Today the BoC highlighted that while the ongoing tariff spat with the United States could raise prices, the resulting blow to the economy could also sap demand from consumers and businesses, putting downward pressure on inflation.

“Clearly, the Bank of Canada is mindful of its inflation-fighting credibility, which has been bruised by the pandemic experience and the Bank’s tendency to brush off that spike as transitory,” Desjardins deputy chief economist Randall Bartlett wrote in a research report.

“The market reaction following the announcement suggests investors are acknowledging that a follow-up rate cut in April is no slam dunk,” he added.

“Our forecast has embedded a more gradual rate cut profile than would be expected absent the upward pressures on inflation, but clearly the BoC will want to assess the early evidence, both on growth and inflation, before offering more accommodation.”

Mackenzie Investments suspects the BoC is trying to stay near the bottom of its neutral range, which now sits between 2.25 and 3.25 per cent, says chief strategist for fixed income Dustin Reid in a statement sent to Yahoo Finance Canada.

The neutral rate is a theoretical interest rate for a balanced economy, where neither stimulus nor restrictions are required. The BoC offers periodic updates on its estimate for the neutral rate range.

That rate may be pushed up next month to 2.50–3.50 per cent, Reid says, “thanks in part to a higher expected U.S. neutral rate.” If that happens, the easing cycle could soon be over, Reid adds — although with the now standard tariff caveat: “unless there is a material downshift in the Canadian economy due to tariffs or otherwise.”

Economists at National Bank of Canada also noted a hawkish tone in the BoC’s language today, and cited other areas that suggest the BoC may not be quick to cut in mid-April.

“The Bank dropped all references to excess economic slack/the output gap, instead saying Canada’s economy entered 2025 on solid footing on the back of robust GDP growth,” Taylor Schleich, Ethan Currie and Warren Lovely write in a note published at midday.

National Bank had previously expected a parade of further cuts, bringing the overnight rate to 2.0 per cent this summer. “However, the Bank’s evolving view/focus on inflation suggests the bar to rapid rate relief is somewhat higher than we’d thought,” the economists say. “That means data dependence will be more important as the Bank won’t simply cut in anticipation of economic weakness.”

Nonetheless, if the economy worsens, they say, “it could be difficult for the BoC to stand on the sidelines. That’s especially true if you believe their earlier analysis that shows the near-term negative growth impacts of a trade war are disproportionately larger than near-term inflation pressures.”

“The BoC will support the economy through a trade shock, but not at the expense of sacrificing the credibility of the longer-run inflation target,” says RBC senior economist Claire Fan in a new research note.

On Wednesday, BoC Governor Tiff Macklem acknowledged the Bank’s limitations, saying “monetary policy cannot offset the impacts of a trade war.”

Fan expects the Bank to cut its policy rate to 2.25 per cent by “around mid-year.”

“We continue to expect (and consistent with BoC communications today) that there won’t be a race to the bottom for interest rates beyond those previously expected cuts this year,” she wrote.

The BoC’s series of interest rate cuts have “helped ease construction, material, and land costs, keeping some investor interest alive in housing development,” says Adrian Rocca, the founder and CEO of rental property developer Fitzrovia. But in the current context, defined by tariffs and sluggish policy change, the cuts “are only lifeboat measures” that won’t solve Canada’s housing crisis, he says.

“Without bold fiscal reform to attract capital and drive sustained supply to meet the demands of our population, we’re nowhere near reaching solid ground.”

With an election on the horizon, Rocca says the conversation needs to be about “radical reform to our fiscal, natural resource and housing policies that will drive immediate supply into the market, not just marginal monetary moves.”

The Bank of Canada’s seventh-consecutive rate cut since last June is welcome news for homebuyers, as the housing market faces a potential slowdown linked to the Canada-U.S. trade war.

That’s according to Phil Soper, president and CEO of Canadian realtor Royal LePage.

“While ongoing trade tensions will sow hesitancy in the minds of some consumers, purchasers who are motivated to transact this spring are well-positioned to use their enhanced borrowing power to their advantage, in a market with more inventory to choose from,” he stated in a press release.

“The housing market, while it may see a temporary slowdown in activity, remains largely insulated from trade disputes, ensuring its resilience in the long term.”

The S&P/TSX Composite Index, which has been weakened by threatened and actual tariffs, was up around 0.5 per cent the two hours after the BoC announcement, hitting 24,370.95 at 11:47 a.m. ET.

Michael Constantino, CEO of online investment platform Webull Canada, called the reaction “an upbeat response.” The gains seen so far today are “particularly within sectors sensitive to interest rate changes, such as real estate and resources,” he said.

In a note sent to Yahoo Finance Canada, Jeff Brown, head of commercial solutions at Equifax Canada highlighted the worsening sentiment among consumers and businesseswhich Macklem and Rogers each referred to in today’s press conference. Today’s cut, Brown writes, “reflects the mounting financial strain” being experienced.

“At Equifax Canada, we’re seeing businesses navigating a perfect storm — rising interest costs, trade uncertainty, and now a shifting interest rate environment,” Brown says. “The key question is whether this cut will provide lasting relief or simply delay the financial pressures that are already building.”

With the possibility that inflation could rise, Brown writes, “it will be important for businesses to leverage this window of opportunity before this environment forces the Bank of Canada to start moving in the opposite direction.”

The Bank of Canada’s move to lower its key rate today shows policymakers view weaker economic growth as a greater risk to the economy than inflation, according to Manulife Investment Management.

“We think growth concerns will nonetheless prevail over inflation risks,” macro strategy director Dominique Lapointe stated in a research note on Wednesday.

“The decision to cut today actually reflects those dynamics.”

Lapointe says tariffs act as a supply shock or one-time price increase, rather than sustained inflation.

“Supporting growth makes more sense in that case,” he added.

“Even if the BoC witnessed a larger and sustained rise in medium-term inflationary pressures, it would be partially offset by weaker core inflation through a larger output gap.”

Lapointe expects three more rate cuts in 2025.

The BoC cut today despite recent strength in the economy, indicating that “the Bank sees it as its mandate to do what it can to offset the economic impact” of the tariffs, Philip Petursson, IG Wealth Management’s chief investment strategist, says in an email to Yahoo Finance Canada.

“What we take away from this is that as long as the tariffs remain, the Bank of Canada will continue to ease,” Petursson said.

The loonie is likely to remain where it is, he adds, “but the risk is to the downside if the potential for higher tariff-induced U.S inflation leads the Fed to pause.”

Desjardins Group economist Royce Mendes notes a “somewhat hawkish” tone in today’s BoC language. He points to the “unusual move” of the Bank publishing early business and consumer survey results, which indicate those groups’ worries about rising inflation.

“Officials are very concerned that inflation expectations might become unmoored,” he wrote.

As such, Mendes says a rate cut in April is far from guaranteed.

“Assuming that the drag from the trade war shows up only gradually and financial market volatility doesn’t translate into concerns about financial stability, a rate cut in April will depend on medium- and longer-term inflation expectations remaining anchored.”

The Bank of Canada is due to push its policy rate to two per cent via 25-basis-point cuts at its next three meetings, according to Capital Economics.

“As price changes tend to follow changes in demand with a lag, whereas tariff-related price hikes will be more immediate, this raises the risk that the Bank will be slower to lower interest rates from here than we have assumed,” deputy chief North America economist Stephen Brown wrote on Wednesday.

“Nonetheless, for now at least, we continue to expect 25-basis-point cuts at the next three meetings until the policy rate reaches two per cent.”

TD Economics’ James Orlando says today’s cut amounts to “insurance that tariffs will persist” and depress Canada’s economy. Relatively positive data on growth and employment “won’t matter much with the narrative now fully altered to incorporate a trade war.”

TD is now modelling “a shallow recession under the assumption that Canadian exporters will face an effective tariff rate of 12.5 per cent for at least the next six months,” Orlando said, noting that this is substantially higher than the sub-2-per-cent rates for most trade.

Should the tariff narrative persist, TD expects the BoC’s overnight rate to hit 2.25 per cent in June, he says, with “limitations in going further due to the delicate balance in managing inflation expectations.”