Economists say Bank of Canada should make unscheduled cut to its overnight rate to temper effects of tariffs

Economists at National Bank of Canada are urging Bank of Canada Governor Tim Macklem to make an emergency cut to the bank’s overnight rate to offset effects of tariffs announced by US President Donald Trump on Saturday.  

The tariffs, 25% on Canadian goods and services imported into the US, with exception of a 10% tax on Canadian energy, are scheduled to come into force on Tuesday. 

Canada retaliated by slapping 25% tariffs on US goods worth an estimated $155 billion.   

In a note, National Bank chief economist Stéfane Marion and his team, wrote the Bank of Canada, which is scheduled to make its next rate announcement on March 12, could cut its policy rate prior to that to help the economy absorb the impact of a trade war.   

“Note that an emergency action would argue for a larger-than-normal cut of at least 50 basis points,” they wrote, adding they would still call for 25-basis-point cuts on March 12 and again in April to bring the benchmark rate, which determines variable interest rates in Canada, down to 2% by the spring.  

Referencing Trump’s supposed reason for implementing tariffs on Canada and Mexico, that being to tighten security at the two countries’ borders with the US, Marion wrote, “Once progress is recognized, we expect tariffs to be reduced but not eliminated.” 

“Given the new administration’s protectionist stance, we anticipate that tariffs will settle at 10%, aligning with the lower bound imposed on Canadian energy goods.”   

Still, the tariffs’ effects on Canada’s economy are likely to be severe, says Canadian Mortgage Professional, adding “National Bank is downgrading its forecast for 2025 GDP growth to 0.4%, down from 1.4%, with the unemployment rate projected to jump to an average of 7.4% this year.”   

In their note, the National Bank economists wrote the trade war will hit the Canadian dollar, predicting headline inflation is likely to increase by 2.3% this year, up 0.1% from its previous assessment.  

As a small economy, Canada is “particularly vulnerable” to a trade war, wrote the economists, but "although the impact is likely to be more severe on the northern side of the border, Canada remains a vital part of the US economic strategy,” they wrote, “which supports the case for a more measured and less punitive tariff structure.”