ING sees Bank of Canada cutting rates amid tariff-induced recession fears

Investing.com -- ING Economics economist James Knightly anticipates a further rate cut from the Bank of Canada (BoC) due to the cloudy outlook caused by tariffs. The BoC is expected to implement a 25 basis point (bp) rate cut on March 12, aligning with market expectations.

Over the past 10 months, the BoC has reduced its policy interest rate by 200bp due to weak growth, increasing unemployment, and subdued inflation. It is expected to follow this trend with another 25bp cut this Wednesday. Knightly anticipates that the pace of cuts will slow following next week's move, forecasting just one more rate cut in the second quarter.

This is in spite of an unexpectedly strong annualized GDP growth of 2.6% in Q4. However, ING believes evidence from January suggests a return to the previous trend of weak growth. The implementation of tariffs on Canadian imports by the US is intensifying recession concerns.

Given that 76% of Canadian exports, equivalent to 20% of Canadian GDP, are destined for the US, the potential consequences are significant.

Canada has already imposed tariffs on CAD$30bn of imported US products, which will increase prices for items such as orange juice, appliances, and motorcycles. However, with unemployment at 6.6% and inflation generally in line with the target, Knightly believes the BoC has room to implement another insurance rate cut.

The USD/CAD has been hovering around 1.43-1.44 following Trump's second delay of a 25% tariff.

Knightly predicts that downside risks for the Canadian dollar will persist in the coming months. Even without a flat 25% tariff, Canadian goods are being selectively targeted by the US. Once the "reciprocal tariff" phase begins in April, Canada could be disproportionately affected due to its high export volumes to the US.