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(Bloomberg) -- The Bank of Canada is expected to cut interest rates more deeply as US President Donald Trump’s tariff barrage sends world markets into a tailspin and data show the Canadian job market already taking damage.
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Traders in overnight swaps see policymakers led by Tiff Macklem cutting the key policy rate by another 75 basis points this year, falling to 2% from the current 2.75%. Just last week, markets were pricing the so-called terminal rate at 2.25%.
The worst two-day market rout since March 2020 is hurting Canadians’ wealth, and growth prospects in the northern nation are getting hammered as analysts slash economic outlooks across the globe. Canada’s business and consumer confidence has already taken a major hit as the country was one of the first to face Trump’s tariff assaults. On Friday, Statistics Canada reported the country shed 62,000 full-time jobs in March, the most since 2021.
Traders in overnight swaps put the odds at about a coin flip for another rate cut at the central bank’s next decision on April 16, up from just over a third on Thursday.
At the same time, the trade war is likely to push up inflation, limiting the extent to which the Bank of Canada can cut borrowing costs to support the economy. Still, on Thursday, Prime Minister Mark Carney signaled his government’s retaliatory response is designed in part to prevent an escalation of conflict with the US. That has the potential to limit the price shock and give the central bank some additional cutting room.
“The likely inflation transmission from that response is much smaller than a full ‘dollar-for-dollar’ retaliation,” Dominique Lapointe, an economist with Manulife Financial Corp., wrote in a report to investors.
Carney on Thursday announced 25% tariffs on US vehicles that don’t comply with the US-Mexico-Canada Agreement, as well as on the American components of autos that are shipped under the trade deal. That mirrors Trump’s tariffs on Canadian autos, and adds to existing Canadian retaliatory levies on C$60 billion ($42.2 billion) in US products, including steel, aluminum, electronics and cosmetics.
“If we start slapping tariffs on the US, which will not be optimal for the Canadian economy, then you’ll limit the ability of the central bank to cut rates,” Stefane Marion, chief economist with National Bank, said in an interview.