MARKET NEWS

By Daniel Johnson

Economists at TD Bank say the Bank of Canada is unlikely to stop its rate cutting cycle amid escalating trade risks that could weigh on economic growth.

On Wednesday, TD Economics published a report updating its economic and financial outlook as the Bank of Canada looks to respond to various policy shifts from the incoming Donald Trump administration. Trade tensions have increased after U.S. President-elect Trump pledged new tariffs on Monday. He said on his Truth Social media platform that he would introduce 25 per cent tariffs on all products from Canada and Mexico as well as an additional 10 per cent on all goods from China.

TD Economics noted that the Bank of Canada cut interest rates by 25 basis points three times over the summer, followed by a 50-basis point cut in October, with some uncertainty in markets whether the central bank will do another 50-basis point cut in December.

“The latter is edging out the odds, but the broad takeaway is that the BoC (Bank of Canada) is unlikely to halt its rate-cutting cycle just yet, and particularly amidst escalating trade risks that are net negative for economic growth, despite a near-term inflation spike,” the report said.

The economists noted their forecast maintains a spread of 100 basis points between the Bank of Canada and the U.S. Federal Reserve.

“This policy rate differential will keep a lid on the Canadian dollar. However, the near-term shifts in the loonie will be dominated by trade-talk. If president Trump follows through with punitive tariffs once officially in office, the loonie may revisit sub-70 U.S. cents levels, last sustained two decades ago,” the report said.

The economists noted that inflation has “settled” near the central bank’s two per cent target amid declines in the Canadian dollar.

“Now, new risks are mounting with population growth set to stall amidst the threat of U.S.-imposed tariffs. This may be partly why the Ontario and federal governments unexpectedly flooded households with rebate cheques,” the report said.

“Perhaps this reflects a pre-emptive move to shore up confidence and spending, while also taking pressure off the Bank of Canada to cut more deeply and risk exacerbating housing and financial risks.”

Prime Minister Justin Trudeau announced last week that starting on Dec. 14, the goods and services tax would be taken off a number of items for a period of two months to help with affordability. The federal government also announced plans to send $250 cheques in the spring to Canadians who, working in 2023, earned up to $150,000.

“With governments injecting more stimulus, the Bank of Canada can do a little less. We have removed a quarter-point cut from the forecast with an expectation that the policy rate will come to rest at 2.5 per cent by the end of 2025,” TD Economics said in the report.

“However, we are prepared to remove another rate cut from the profile if households spend a greater share of their rebates and tariff threats recede.”