BoC poised for seventh rate cut as Trump tariffs threaten recession

The Bank of Canada is expected to cut interest rates for the seventh time in a row this week, moving deliberately into economic territory that would have seemed reckless just months ago. The decision, likely to come Wednesday, reflects a central bank choosing to prioritize the threat of recession over the more familiar worry of runaway inflation. At stake is whether rate cuts can cushion Canada against the economic shock of Donald Trump's tariffs—a question that no monetary policy textbook can fully answer.

Trump's trade offensive has upended the calculus for central bankers. In January, the Bank of Canada lowered its benchmark rate to 3 per cent as a precaution against a potential trade war. Since then, the U.S. president has imposed 25-per-cent tariffs on Canadian imports, partially lifted them, threatened more, and created a fog of uncertainty that has left businesses and households scrambling. On the same day the central bank meets, steel and aluminum tariffs are scheduled to take effect. The Canadian dollar has depreciated in response. Ottawa has announced retaliatory measures. The integrated North American economy, which has defined Canadian prosperity for decades, is fracturing in real time.

Governor Tiff Macklem has been candid about the limits of what interest rate cuts can do. Tariffs create a bind for central bankers: they suppress economic growth and employment while simultaneously pushing up prices. The traditional response to one problem worsens the other. But in the current environment, traders and analysts expect the bank to lean heavily toward supporting demand rather than fighting inflation. Financial markets are pricing an 80-per-cent probability of another quarter-point cut, which would bring the policy rate to 2.75 per cent—the midpoint of what the bank considers neutral territory.

The economic backdrop makes this choice urgent. A KPMG survey of 602 export-oriented companies found that more than half had already begun cutting production or laying off workers in anticipation of tariffs. Business investment is freezing. Royce Mendes, head of macro strategy at Desjardins, noted that companies are reluctant to build or expand in Canada given the uncertainty, and that investment is unlikely to return to pre-tariff levels even if Trump backs down. The February jobs report, released Friday, showed only 1,100 positions added and an unemployment rate holding at 6.6 per cent—a sign that the labour market's earlier momentum is fading.

The bank's own modelling paints a stark picture of what a prolonged trade war could mean. If tariffs remain at the levels Trump imposed this week, the central bank estimates exports could fall 8.5 per cent, business investment could decline 12 per cent, and consumer spending could drop 2 per cent. Over two years, that would translate to a 3-per-cent reduction in Canadian economic output compared to a scenario without tariffs. These are simulations, not forecasts, and their accuracy depends entirely on Trump's next move—something no economic model can reliably predict.

Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, argued that while tariffs will create a temporary bump in inflation, the broader context of economic slowdown and reduced household spending power makes a sustained wage-price spiral unlikely. The central bank's job, he wrote, is to look beyond the immediate horizon and support domestic demand as an offset to the supply shock. Rate cuts cannot reopen shuttered factories, but they can help households and businesses maintain spending when confidence is collapsing.

Macklem has warned publicly that a major tariff shock could push Canada into recession in the coming quarters. The central bank will likely play a supporting role, with Ottawa and the provinces taking the lead on direct financial support for affected businesses and workers. But in a speech last month, Macklem signalled the bank would not remain passive. Provided the inflationary impact of tariffs is not too severe, he said, monetary policy can help smooth the adjustment by preventing demand from weakening more than supply. That philosophy appears to be guiding the decision the central bank is about to make.