The Bank of Canada cut its benchmark lending rate by 25 basis points to three per cent in a move that was widely expected by investors and economists, but what comes next is up in the air given the looming trade war with the United States.

It’s the sixth consecutive cut by the Bank of Canada in a trimming cycle that began last June when rates stood at five per cent, and drops it to just under the top end of its neutral range of 3.25 per cent.

Bank of Canada governor Tiff Macklem signalled in December while policymakers cut rates by 50 basis points that the new year would bring more of a wait-and-see approach.

That appears to be the case since the Bank of Canada statement accompanying its rate decision gave no clues about future rate decisions.

But Macklem’s way forward could be challenged by new U.S. President Donald Trump and the tariffs he has threatened to place on Canada as early as Feb. 1.

“A protracted trade conflict would most likely lead to weaker (gross domestic product) and higher prices in Canada,” policymakers said in a statement accompanying the rate decision.

Here’s where economists think the Bank of Canada goes from here on interest rates.

Wary of inflation: Capital Economics

Unlike previous interest rate decisions, the Bank of Canada was silent on where it will go from here on rates, Stephen Brown, deputy chief North America economist at Capital Economics, said.

“Strikingly, in its policy statement, the (Bank of Canada) dropped the line from December that ‘we will be evaluating the need for further reductions in the policy rate one decision at a time’ and it was not replaced with anything resembling forward guidance,” he said in a note.

Brown said there could be two reasons to explain the change: one is that rates have fallen within the central bank’s neutral range of 2.25 per cent to 3.25 per cent, while the other relates to the uncertainty over how policymakers might need to respond to Trump’s tariff threats.

The economy is already weak and suffering from excess supply, which could lead to a further drop in inflation, but Brown thinks Macklem is also wary of inflation rising due to “higher input prices and supply chain disruptions” brought on by tariffs.

“That suggests the Bank of Canada is taking the lessons from the pandemic seriously and that it will not necessarily cut interest rates further, even if tariffs hit the economy hard,” he said.

For now, Capital is calling for two more rate cuts in 2025, though there are “risks” to that forecast, Brown said.

‘Rates still too high’: CIBC

“The Bank of Canada isn’t certain about what comes next, but then again, who is?” Avery Shenfeld, chief economist at CIBC Economics, said in a note.

He said the central bank’s actions imply caution because it’s not clear where the neutral rate lies “and how low rates have to go to deliver still-needed stimulus.”

Policymakers indicated that growth and consumption are picking up, so there’s above-potential expansion over the next year.

“Our judgment is that rates, including five-year mortgages, are still too high to deliver the necessary lift,” Shenfeld said.

Given that the Bank of Canada described the labour market as “soft” and said inflation was “near” its two per cent target, he thinks policymakers will need to cut by another 75 basis points this year, which would bring rates to 2.25 per cent.

On the tariff front, Shenfeld thinks any rise in inflation would take a “temporary,” hit but that growth would take a “material hit.”

‘Help economy adjust’: Desjardins Group

The Bank of Canada’s next move hinges on whether tariffs materialize, Royce Mendes, managing director and head of macro strategy at Desjardins Group, said.

“In the event that no tariffs are implemented between now and the next rate announcement, it’s likely that central bankers take at least a brief pause in March,” he said in a note, basing his belief on evidence that the previous five rate cuts are stimulating economic growth and consumption and that inflation is holding steady around the two per cent target.

“That being said, the threat of a trade war with the U.S. is very real,” he said, noting the Bank of Canada’s base-case projections do not make allowances for such an event.

However, a separate scenario analysis of the fallout from 25 per cent tariffs indicates the economy would fall into a recession, temporarily causing inflation to rise as Canada strikes back and the Canadian dollar continues slumping against its U.S. counterpart.

“The magnitude of that acceleration in price growth shouldn’t be enough to stop the central bank from responding to the economic weakness with lower interest rates,” Mendes said. “Easier monetary policy isn’t a cure for a trade war, but it can help the economy adjust.”

Desjardins is calling for the Bank of Canada to cut interest rates to 1.5 per cent if a trade war erupts.

If tariffs only come in at 10 per cent, Canadians should look for rates to fall to 2.25 per cent by the end of 2025 “given weakness in the domestic economy.”

• Email: gmvsuhanic@postmedia.com

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