The trade battle between the U.S. and Canada is prompting economists to predict the Bank of Canada will lower its policy interest rate to two per cent this year, almost as low as before the COVID-19 pandemic.
The central bank will trim the rate a full percentage point from the current 3% by October, according to the median estimate in a Bloomberg survey of 12 economists. Previously they expected the bank to end its cutting cycle at 2.25%, the terminal price currently expected by traders in overnight swaps.
Economists’ latest forecast includes another quarter percentage point cut from officials at the bank’s next meeting on Wednesday.
The survey results capture the major uncertainty posed by US President Donald Trump’s tariff strategy, which saw the world’s largest economy adding levies on Canadian goods last week, only to carve out some exemptions. The Trump administration is expected to put 25% tariffs on steel and aluminum imports on Wednesday.
The Canadian government has retaliated by applying counter-tariffs on about C$30 billion ($20.8 billion) of US goods, a move supported by six out of the eight analysts who responded to a question on the appropriateness of that decision.
All of the economists in the survey said Trump’s trade policy was having a significant impact on their interest rate forecasts for 2025 and 2026, affecting accuracy or adding risk. Economists agreed that the looming threats are having an impact on business investment decisions in Canada.
Some 60% of respondents say the central bank should move borrowing costs into stimulative territory in order to respond to a period of stagflation brought on by a tariff war. The same proportion see the net impact of a trade war as inflationary.
Economists in the poll unanimously agree with Bank of Canada Governor Tiff Macklem’s proposition that Canada should stick with its 2% inflation target during the central bank’s upcoming framework renewal.
Respondents also agree with policymakers’ proposal to examine their preferred measures of core inflation. Eight out of 10 economists say the bank should “reconsider” so-called trim and median core inflation gauges.
Additional responses
- Asked about the Bank of Canada’s decision to add a second external deputy governor position, six of nine said the bank should stop expanding the size of its governing council.
- Nearly three-quarters of respondents agree with the bank’s assessment that trade uncertainty is primarily responsible for driving the loonie’s depreciation against the US dollar.
- Four economists support prime minister-designate Mark Carney’s proposal to split the federal budget into operating and capital spending; three were unsure.
Erik Hertzberg and Dana Morgan, Bloomberg News
©2025 Bloomberg L.P.
