Bank of Canada cut overnight rate again amid ongoing trade war. What is next?

The Bank of Canada, as expected, lowered its key interest rate on Wednesday, March 12. Two prominent financial experts believe that this move will likely be followed by a phase of fiscal stimulus from the federal government, aimed at helping Canadians navigate the ongoing trade war with the United States.

The central bank reduced its overnight rate by 25 basis points (0.25%) from 3.00% to 2.75%, marking the seventh consecutive rate cut since June of last year.

Warren Lovely, Chief Rates Strategist at National Bank of Canada, stated during a discussion on Bloomberg on Wednesday morning that the rate cut came as “no surprise,” given the threats posed to the Canadian economy by the numerous tariffs imposed by U.S. President Donald Trump.

“I think we all agree that monetary policy is not a perfectly calibrated tool to counteract trade wars. We know that in a ‘beggar-thy-neighbor’ scenario and a full-scale retaliatory battle, concerns about inflation arise, and I am sure they are taking this into account,” Lovely noted.

Ed Devlin, founder of Devlin Capital, Senior Fellow at the C.D. Howe Institute, and former Head of Canadian Portfolio Management at PIMCO, said during the discussion that he expects the federal stimulus package to be more effective than the support provided to Canadians during COVID-19.

At the same time as the Bank of Canada announced its rate decision on Wednesday, Canadian officials imposed reciprocal tariffs on U.S. goods in response to Trump’s 25% duties on all steel and aluminum imports, which took effect at the beginning of the day.

Warren Lovely also noted that previous rate cuts by the Bank of Canada had already helped strengthen the Canadian economy in recent months, but trade tensions have begun to weigh on consumer and business confidence.

“Buyers truly need to be confident in the economic outlook and their own career prospects… The irony is that we had signals indicating that the Canadian economy was starting to show signs of life in response to earlier rate cuts,” he said.

Lovely stated that restoring business and consumer confidence in this uncertain economic environment should be the top priority for Canadian officials, who need to look ahead with the goal of building a more resilient and self-sufficient economy.

“The right decision for today was the Bank of Canada’s rate cut, and I don’t think they are done yet,” emphasized the Chief Rates Strategist at National Bank of Canada.

Ed Devlin, in turn, noted that in his opinion, the Bank of Canada will continue to lower the key rate until it reaches 2.00%. This view is shared by economists at two of Canada’s largest banks, RBC and TD.

The next Bank of Canada monetary policy meeting is scheduled for April 16.