BofA: Expect Bank of Canada to cut rates amid tariff uncertainty

Investing.com -- Carlos Capistran, an economist at B of A Securities, predicts that the Bank of Canada (BoC) will cut its policy rate by 25 basis points (bp) on March 12, 2025, bringing it down to 2.75%. This expectation is due to uncertainties concerning tariffs and a weakening labor market.

Capistran, along with his colleagues, anticipate limited forward guidance from the BoC. They suggest that the current climate of tariff uncertainty, coupled with controlled inflation and a soft labor market, makes a 25bp cut likely. The risk lies in the bank deciding to hold rates.

The Canadian economy showed robust growth in 2024, expanding by 1.5%, above both the BoC's estimate of 1.3% and B of A's forecast of 1.2%.

However, the imposition of tariffs by the US on Canadian imports on March 4, 2025, poses a downside risk. The analysts believe that the uncertainty surrounding these tariffs is enough to slow economic activity, potentially causing the economy to grow below potential, which would necessitate a more relaxed monetary policy.

The February 2025 labor report was soft, with almost no net job creation. The employment rate remained steady, and the unemployment rate stayed at 6.6%. The analysts believe that rate cuts will help boost the labor market, but migration controls could pose a downside risk to employment.

On the foreign exchange front, the trend is set at the start of the month. The analysts expect the BoC's decision this week to have a limited impact on the exchange rate, as tariff negotiations continue and there is uncertainty over the timing of the upcoming election. They predict that USD/CAD should stabilize around 1.42-1.43.