With the threat of tariffs looming, is this the end of quantitative tightening?

On January 29, the Bank of Canada (BoC) announced a 25 basis points (bps) rate cut, bringing the target for the overnight rate to 3.00%. In a press release, the BoC announced a plan to end quantitative tightening and complete the normalization of its balance sheet by restarting asset purchases in March. For details, read Bank of Canada reduces policy rate by 25 basis points to 3%, announces end of quantitative tightening Opens a new window..

With gradual asset purchases, the balance sheet will start to stabilize and grow modestly in line with economic growth. The BoC noted an increase in growth in the last quarter (Q4 2024) and expects growth to be above its potential over the next two years — in part due to lower interest rates.

CIBC Capital Markets says the January 29 rate cut was expected and although the BoC can’t be sure what’s ahead, it has a plan to end quantitative tightening. No one can be certain how low rates need to go to support an economic stimulus, but we do know the threat of potential tariffs by the new U.S. administration is a good reason to be cautious with monetary policy.

CIBC Capital Markets believes interest rates are still too high to deliver the needed economic boost and forecasts an additional 75 bps of interest rate cuts. The threat of tariffs from the U.S. is weighing on confidence. A trade war may provide a temporary benefit to inflation, but it could also have a negative impact on economic growth over the long term.

Steven Dubrovsky, First Vice-President, Global Fixed Income, CIBC Asset Management confirms the BoC is now more comfortable with the size of its balance sheet following the extraordinary support measures put in place following the global pandemic. He also says it’s reasonable to expect the easing bias in monetary policy will continue. “We interpret the BoC’s comments as slightly dovish and expect they should support the bond market — particularly in the front end.”

He confirms, “The immediate future remains highly uncertain with the threat of trade tariffs and the Canadian government pledging to respond with all options on the table. Although tariffs are generally seen as inflationary, the potential hit to economic growth could force the BoC to announce more interest rate cuts later this year. If this scenario unfolds, it would be supportive for bonds.”

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