Bank of Canada rate cut ‘chicken soup’ to economy threatened by Trump’s tariffs #CanadaFinance

Bank of Canada interest rate cuts might not be able to fix the damage of a trade war — but they can’t hurt either, say economists.

Many are predicting another 25 basis point cut when the central bank announces its decision Wednesday, bringing the interest rate to 2.75 per cent.

Just a few weeks ago the odds were much lower. But since then U.S. President Donald Trump has launched an on-again, off-again tariff assault that has cast a pall of uncertainty over Canada, arresting business investment and crushing consumer confidence.

“Monetary policy, and its singular instrument, interest rates, can’t be a cure-all for the trade risks that will ail the economy in the months ahead,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

“But like chicken soup for a cold, it couldn’t hurt either, and might make some corners of the economy feel a little better.”

If not for the trade war, there would be plenty of reasons for the central bank to pause this month, said Shenfeld. Gross domestic product has been beating expectations  and soft job numbers in February still showed a strong average gain over the past three months. Inflation remains at acceptable levels.

But now all that is in the “rear-view mirror” he said, and a grimmer prospect looms. If 25-per-cent tariffs are reinstated in April, Canada’s GDP will shrink in the second quarter and unemployment will rise. Aid announced by the federal government Friday for businesses and individuals hurt by tariffs will help, but larger programs will likely have to wait a few months because of the upcoming election.

“Make no mistake, the trade war is still very much in play,” said Shenfeld.

Even if the “fentanyl” tariffs are dropped, Trump could easily find reason to replace them with “reciprocal” duties.

Canada’s dairy controls, the digital services tax, and the GST/HST have all been identified as trade irritants by Trump’s administration.

Hefty duties on steel and aluminum imports to the U.S. are scheduled to take effect Wednesday.

Canada’s central bank can’t “reopen a shuttered factory,” but it can help by smoothing the adjustment period, something governor Tiff Macklem noted recently, suggesting he was on board for more cuts, said Shenfeld.

Even economists whose base case forecast is a pause on Wednesday say the Bank of Canada faces a “tough call.”

“U.S. trade risks could still easily tilt odds towards a seventh consecutive cut,” said Royal Bank of Canada economists Nathan Janzen and Claire Fan.

“What U.S. trade policy will look like week-by-week (or even hour-by-hour) is still highly uncertain. And that uncertainty itself is already threatening to choke off a recovery in Canadian business investment,” they said.