That would be a full 100 basis points (1%) below BMO’s current forecast, which projects the Bank of Canada’s rate to reach 2.50% by year-end.
BMO has updated its forecast in response to the potential implementation of U.S. tariffs—20% on most Canadian goods and 10% on oil and gas—which were originally set to take effect today. However, in a last-minute decision, President Trump announced a 30-day delay, extending a similar agreement previously reached with Mexico.
BMO economist Michael Gregory told Canadian Mortgage Trends that if these tariffs are ultimately enforced, a more aggressive rate-cutting cycle could become a real possibility.
“If tariffs are actually put in place, then a -150bps cut enters the realm of possibilities again,” he said.
This could push Canada-U.S. overnight rate spreads beyond -225 bps, nearing the record lows set in 1997.
For now, with the delay in place, Gregory noted that the tariffs have shifted “from being an essential certainty to now being a risk.”
Tariffs Could Prompt Emergency Bank of Canada Rate Cut
With tariffs appearing imminent, economists at National Bank suggested there was a strong case for an emergency or larger-than-usual rate cut by the Bank of Canada.
“To mitigate the impact on Canada’s real economy and support financial conditions, we see a strong argument for an emergency or inter-meeting rate cut by the BoC,” they wrote.
They also noted that with the policy rate currently at 3%, it remains in the upper half of the estimated neutral range of 2.25% to 3.25%, leaving room for further adjustments if necessary.
Economists at National Bank suggest that if emergency action is taken, the Bank of Canada could implement a larger-than-usual rate cut of at least 50 basis points.
Looking ahead, they predict additional 25-bps cuts in March and April, which could bring the policy rate down to 2.00% by spring.
Beyond monetary policy, tariffs are expected to weaken the Canadian dollar, slow economic growth, and potentially push the country into recession. Persistent tariffs could also trigger inflationary pressures, adding further strain to the economy.
However, these outcomes remain uncertain, depending on developments over the next 30 days.
As part of the agreement to delay tariffs, Canada has pledged to strengthen border security and combat fentanyl trafficking, expanding its $1.3-billion protection plan. Additional measures include classifying cartels as terrorist organizations, forming a cross-border task force, allocating $200 million to anti-trafficking efforts, and appointing a fentanyl czar to lead the initiative.