Bank of Canada lowers rates by 25 basis points as expected

March 12, 2025 at 01:45PM

The market was 96% priced for a rate cut today

Heightened trade tensions and tariffs imposed by the United States
will likely slow the pace of economic activity and increase inflationary
pressures in Canada

The economic outlook continues to be subject to more-than-usual uncertainty

The US economy looks to have slowed in recent month

economic growth in the first quarter of 2025 will likely slow as the
intensifying trade conflict weighs on sentiment and activity

Recent surveys suggest a sharp drop in consumer confidence and a
slowdown in business spending as companies postpone or cancel investment

In February, job growth stalled

There are warning signs that heightened trade tensions could disrupt the recovery in the jobs market

The Bank’s preferred measures of core inflation remain above 2%

Monetary policy cannot offset the impacts of a trade war

There is no strong guidance in the report but the comments are generally bearish on the economy and dovish overall, despite some unexpected strength at the end of 2024.

“Governing Council will be carefully assessing the timing and strength of
both the downward pressures on inflation from a weaker economy and the
upward pressures on inflation from higher costs. The Council will also
be closely monitoring inflation expectations”

Macklem will hold a press conference but the opening statement was pre-released:

We’re now facing a new crisis

Our surveys suggest that threats of new tariffs and uncertainty about
the Canada-US trade relationship are already having a big impact on
business and consumer intentions

Canadians intend to spend more cautiously

Businesses have lowered their sales outlooks

Many businesses have scaled back their hiring and investment plans

The recent shift in consumer and business intentions is expected to
translate into a marked slowing in domestic demand in the first quarter
of this year

Exports were likely pulled forward ahead of tariffs in Q1 but that will mean weakness ahead

Keeping medium- and longer-term inflation expectations well anchored is imperative to ensure any rise in inflation is temporary

Again, these are dovish comments but not unexpected. The big questions will be the extent of weakness in economic data starting in about April as all the tariffs front-running begins to unwind. Looking at home sales recently, there has been a big step down and I think that’s telling regarding consumer spending overall.

This article was written by Adam Button at www.forexlive.com.