Economists react to Canadian banks’ 25 barrels of lower tax rates: What’s next for the tax rate?

The information from the Bank of Canada in its statement is clear – start with caution. Policymakers warn that monetary policy cannot completely offset the impact of the trade war, and new tariffs are adding new risks to the outlook.

Now, economists from major Canadian banks are weighing this on future tax cuts and how BOCs can balance growth concerns with increased inflationary pressures.

Necessary cuts, but uncertainty is vaguely visible

Most analysts agree that while the economy performed better than expected in early 2025, trade-related uncertainty forced the BOC’s hand.

CIBC’s Avery Shenfeld describes the rate cut as “a band-aid for unknown wounds”.

Although the BOC acknowledges upside and downside risks, he notes that central banks add greater weight to the downside risks of growth, which ultimately justifies the reduced tax rate. “If it weren’t for the threat of trade, there might still be a humble further tax cut, but there was no urgent effort today.”

Similarly, Oxford Economics noted that “increasing uncertainty in trade policy” was a key reason for the BOC’s move, adding that the bank could have paused without the U.S.-Canada trade war in progress, which could have stopped given the expected GDP, employment and inflation data.

Will the BOC continue to cut? Expert split

Even with today’s cuts, Canadian banks have not yet promised to be easier, and some economists believe there may be a pause at the next meeting.

TD Economics noted that while strong economic data can justify the stability of holding tax rates today, the BOC has not had any chance as the risks of the trade war grow.

Senior economist James Orlando said central banks are essentially buying insurance for slowdowns, given how much uncertainty the tariffs create for businesses and consumers. TD still expects to cut twice by June, raising overnight rates to 2.25%, but warns that banks won’t lower much without risky inflation issues.

Oxford Economics agrees, noting that “we cannot completely rule out several 25bps reduction rates to resist the negative impact of ongoing uncertainties”, however, unless trade tensions are greatly intensified, the BOC is unlikely to be below the lower limit of the neutral range (2.25%).

Meanwhile, RBC’s economics highlighted how much uncertainty the BOC is dealing with, noting that the bank removed clear forward guidance from its statement. Chief economist Frances Donald said that while dirty bias is still working, the BOC is “more uncertain than usual” and that multiple scenario analysis is being conducted to measure the impact of tariffs.

Gov. Tiff Macklem strengthened this in a press conference today, saying “monetary policy cannot offset the economic consequences of long-term trade conflicts.”

On the other hand, CIBC is still more compatible, predicting two cuts of 25 barrels in April and June, which will increase the policy rate to 2.25%, a potential spot for this rate cycle. But Shinfield warned that if tariffs remain longer than expected, “a more protracted trade war could require deeper cuts.”

BOC policy interest rates predict 6 major banks

Trade war risks complicate rate path

The ongoing U.S.-Canada trade war is now the biggest factor in the decision of Canadian banks. Experts point out that tariffs are a double-edged sword – they slowed down the economy but also raised prices, making it harder for the BOC to map its next move.

BMO Economics points out that BOC is trying to reach a balanced tone because it makes the risk of weak economic growth and the real risk of tariffs that will drive higher inflation. The bank has updated its official forecast and now expects another third of each of the next three meetings to drop, which will bring the overnight rate to 2% by the end of the year.

“We strongly suspect that weak growth impacts will dominate, and although the bank’s caution means it will be very slow, the ultimate destination for interest rates is lower than the current market,” wrote Douglas Porter, the bank’s chief economist.

National Bank stressed that inflation remains a key limitation for Canadian banks, even as economic uncertainty grows. The company noted that while the BOC was clearly concerned about the negative growth impact of the trade war, it also created a more hawkish tone for inflation, citing rising short-term inflation expectations and higher costs raised by business plans.

“It’s not just the inflation assessment that makes us hawkish,” NBC economists noted. “Banks have abandoned all references about excessive economic slack/output gaps, but rather that Canada’s economy is behind strong GDP growth, entering 2025. While the economy is in better shape,” said NBC economists.
More than most people think we still think there is oversupply there. ”

In a post-announcement press conference, he confirmed that the bank did not “seriously consider” the larger 50bps tax reduction: tension between growth and inflation risk is at the heart of Gov. Tiff Macklem’s message:

“The trade war, yes, it weakens growth, but it also raises prices and inflation. We have to balance both with great caution. So, in this context, we don’t want to be ahead of ourselves.”

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Last modified: March 12, 2025