Andrew Pyle
March 12, 2025
No reason not to cut
Being a North American central banker these days is tough. If economic forecasting wasn’t already a challenge, the policy vortex blowing out of the oval office makes it almost impossible to attach any degree of certainty to one’s projections. Some argue that the best approach is to simply do nothing, and that has been the call for the Federal Reserve for weeks now. Here at home, however, the risks have clearly tilted to the downside on growth, while inflation remains under control. For that reason, the Bank of Canada made the right decision this morning to cut its overnight rate target by a quarter point to 2.75%.
The fact that this decision came just minutes before a joint press conference by the Finance Minister, Foreign Affairs Minister, and outlining the federal government’s response to Trump’s 25% duty on steel and aluminum, highlights the dust storm that the Bank is operating in. In the accompanying policy statement, the Bank said that while the economy remains on solid footing, there is a new crisis facing Canada. Because of U.S. tariffs and the resulting trade tensions, economic growth will likely slow and the Bank cites that this is already impacting consumer spending intentions and company hiring and investment.
Similar to the U.S., Canada’s economy entered Trump 2.0 in decent shape and inflation since the start of the year has firmed somewhat. But it is absolutely clear that the Bank is focused on the road ahead and today’s rate cut is viewed as proactive medicine for the pain that is probably going to come. This decision also puts the April 16th policy meeting in play, especially with Trump still planning retaliatory tariffs on April 2nd. Futures markets are pricing in roughly a 50% probability of a quarter-point cut in April, but 100% odds of such a move by July. Again, the situation is way too fluid to assign any degree of confidence to these implied expectations.
As for market reaction, it is interesting that bonds have actually given back some ground this morning and that has to do with a relatively calmer equity market. Even with the Ottawa tariff announcement, the TSX was up about 0.4% and the Canadian dollar has seen a modest lift to 69.40 US cents. How any of these markets end up by the close is anyone’s guess since no one knows what is going to come out of the White House next.
On behalf of the Pyle Wealth Advisory team, have a rest of the week.
Andrew Pyle
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