BofA expects further BoC rate cuts amid US trade tensions

Investing.com -- On Thursday, BofA Securities released a report analyzing the economic situation in Canada following the Bank of Canada's (BoC) recent policy rate cut. The BoC reduced its rate by 25 basis points to 2.75% on Tuesday, in response to heightened trade tensions and tariffs imposed by the United States, which are expected to slow economic growth and increase inflationary pressures in Canada. BofA Securities anticipates an additional 25 basis point cut in April, with a projected terminal rate of 2.50%.

Governor Tiff Macklem of the BoC refrained from offering forward guidance during the post-decision press conference, citing the high level of uncertainty. Instead, he emphasized the central bank's focus on ensuring that any impact on inflation remains temporary. The BoC is closely monitoring the trade war's dual impact on inflation—potentially driving it up due to higher costs, but also potentially dragging it down due to a weaker Canadian economy.

The BoC acknowledged the limitations of monetary policy in the face of trade disputes, stating that it cannot negate the impacts of a trade war but can prevent higher prices from leading to ongoing inflation. Despite the policy rate cut, the BoC noted a likely slowdown in first-quarter growth, with consumer confidence dropping sharply and businesses reducing or postponing investments. However, a surge in exports, made in anticipation of the tariffs, has partially offset the slowdown in domestic demand.

BofA Securities predicts another rate cut to be announced on April 16, coinciding with the release of a Monetary Policy Report containing updated forecasts. The report suggests that the threat of tariffs will persist until the USMCA trade agreement is renegotiated, continuing to affect economic activity through uncertainty and disruption. BofA also notes that inflation expectations in Canada are likely to remain anchored, allowing the BoC to focus on the downside risks to inflation from a weakening economy.

The report also discusses the broader implications for the Canadian economy, including the impact on Canadian swap spreads, the terminal rate spread between the BoC and the Federal Reserve, and the potential effects on the Canadian dollar CAD/USD. The BoC has indicated that the CAD will be a consideration in future rate decisions, with the currency's strength or weakness influencing policy choices. The report concludes that the magnitude of the growth shock and the trajectory of consumer and business sentiment in the first quarter will be crucial factors in determining the BoC's rate cut decisions going forward.