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Growing recession risks to Canada from the U.S.-led trade war will push the Bank of Canada to cut interest rates at least twice more this year, although a majority of economists said policymakers will leave them unchanged on Wednesday.
As chances of a global economic downturn rise, Canada is likely to suffer
Thomson Reuters
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Growing recession risks to Canada from the U.S.-led trade war will push the Bank of Canada to cut interest rates at least twice more this year, some economists predict,although a majority of economists said policymakers will leave them unchanged on Wednesday.
U.S. President Donald Trump's surprise announcement last week to put a 90-day pause on so-called reciprocal tariffs, except for China, did little to alter pessimism around Canada's economic prospects as U.S. levies on autos, steel and aluminum remain in place.
Unpredictable U.S. trade policy alongside Trump's increasingly severe dispute with No. 2 economy China has raised the chances of a global economic downturn and Canada is likely to suffer, given around 80 per centof its exports go to the U.S.
Economists in the April 7-11 Reuters poll, taken amid the tariff policy uncertainty, now expect the Canadian economy to grow 1.2 per centand 1.1 per centthis year and next, respectively, down significantly from 1.7 per centand 1.6 per centpredicted a month ago. A handful also forecast the economy to fall into recession this year.
"We look for the BoC to pause at 2.75 per centin April as it waits for more clarity around tariff impacts before easing further," said Andrew Kelvin, head of Canadian and global rates strategy at TD Securities.
"Trade policies in place are sufficient to subtract about a percentage point from Canadian growth," Kelvinsaid."As a slowdown in growth begins to take hold, we expect the BoC to resume easing."
WATCH | U.S.-China trade war could increase prices worldwide: U.S.-China trade war could hike prices worldwide 8 days ago Duration 2:03
Just over 60 per centof economists, 18 of 29, expected the Bank to keep its overnight rate steady on April 16 at 2.75 per cent. The other 11 predicted a 25 basis point reduction.
However, just over half of economists, 15 of 29, predicted two more rate cuts by the end of the third quarter as recession fears rise. That will take the rate to 2.25 per cent, the lower end of the Bank's 2.25 per centto 3.25 per centrange for a "neutral" rate that neither stimulates nor restricts growth.
- Trade uncertainty taking a toll on business and consumer confidence: Bank of Canada reports
- Carney warns of 'tough days ahead' as tariffs make U.S. recession 'likely'
There was no clear majority among economists where rates would be by year-end. Interest rate futures are currently pricing around 40 basis points of reductions this year.
Recession risk high
Recent weakness in the labour market and worsening business and consumer sentiment has already raised the alarm, and all but one of 15 economists who answered an additional question said the risk of a recession this year was high.
The Bank of Canada cut its key rate for a seventh consecutive time last month, to 2.75 per cent, marking a total of 225 basis points of reductions since early June.
But the recent surge in inflation, which hit an eight-month high of 2.6 per centin February, far above the mid-point of the Bank of Canada's target range of one to three per cent, puts the central bank in a difficult spot.
- Bank of Canada says it would have likely held interest rate steady if not for tariff uncertainty
All 16 economists said U.S. tariffs had negatively impacted business sentiment, with over 60 per centsaying it was "very negative."
Inflation is predicted toaverage 2.4 per centand 2.1 per centin 2025 and 2026, respectively, compared to 2.2 per centand 2.1 per centpredicted in March.
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