Amid ‘pervasive uncertainty’, the Bank of Canada (BoC) cut the overnight rate 25 bps to 2.75%, taking us to the midpoint of their estimated range for the neutral rate (2.25% – 3.25%).
The Decision.
Recent economic data (i.e., Q4 GDP 2.6%) would have suggested a pause, but declining business and consumer confidence (as per the survey they released before the announcement) led the BoC to cut.
Tariff wars are two-sided, resulting in inflationary pressure and lower growth. Today’s decision shows the Bank is more concerned with the latter.
The Press Conference.
Notables from the post-announcement press conference:
- ‘Pervasive uncertainty’ is shaking business and consumer confidence.
- Q1 data will be skewed by exports/imports being pulled forward.
- Governor Macklem acknowledged that monetary policy cannot offset the impact of a trade war.
- The reality is that tariffs will cause some prices to go up. The BoC’s focus is on limiting the knock-on effect of generalized and ongoing inflation.
- The BoC did not seriously consider a 50 bps cut and remains data-dependent.
Looking ahead.
The BoC will assess the upward pressure on inflation from tariffs and a weaker Loonie versus weaker demand. Looking ahead, we believe that the Bank’s surveys of inflation expectations and business and consumer confidence will be as important as the ‘hard data’.
The bond market has 50 bps of further cuts priced for this year.
