With the threat of tariffs lingering, economic activity is expected to slow

On March 12, the Bank of Canada (BoC) announced a 25 basis points (bps) rate cut, bringing the target for the overnight rate to 2.75% Opens a new window.. The BoC acknowledges that the Canadian economy started the year in a solid position with inflation close to the 2% target. However, heightened trade tensions with the U.S. will likely slow economic activity and increase inflationary pressures in Canada.

CIBC Capital Markets says the recent 25 bps rate cut may only be a Band-Aid, because we don’t yet know the size of the economic wound that will be opened up by U.S. trade policies and potential tariffs. Without trade uncertainties, the BoC may have held rates. But the forecast for business and household confidence, as well as expected slower economic growth, helped make the case for a rate cut. 

Adam Ditkofsky, Senior Portfolio Manager, Global Fixed Income, CIBC Asset Management, confirms the rate decision is in line with our expectations, and our portfolios are positioned accordingly. “The rate decision makes sense given recent market volatility and indecisiveness related to President Trump’s trade war. Although it’s been challenging to navigate this environment because of President Trump’s on-again-off-again tariff comments, our views continue to reflect a risk off trade. We expect lower consumer confidence, weaker gross domestic product (GDP), lower yields and wider credit spreads — and our portfolios are actively managed with this outlook in mind.”

He confirms, “We believe increased monetary stimulus is warranted in this current environment and if this rhetoric continues, we’ll likely see more rate cuts by the BoC being priced into the curve in the near term. While inflation has yet to fully normalize and remains a concern, the BoC will likely need to prioritize economic instability in the near term. Bond and stock market reactions to this announcement are muted, as the rate cut was largely anticipated.”

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