Canada has been granted a temporary 30-day reprieve from U.S. tariffs. However, according to BMO, there is a potential risk that the Bank of Canada may need to reduce its policy rate to 1.50% by the end of the year if the tariffs are implemented.
This would represent a significant decrease of 100 basis points, or one percentage point, compared to BMO's current projection of a 2.50% rate for the Bank of Canada later in the year.
BMO's updated forecast stems from a scenario in which U.S. tariffs—set at 25% on most Canadian goods and 10% on oil and gas—would take effect. Initially scheduled to be implemented today, President Trump announced a last-minute 30-day delay, which also extends a similar arrangement with Mexico.
BMO economist Michael Gregory emphasized that if the tariffs are indeed enacted, a more rapid cycle of rate cuts could become a possibility. He noted, “If tariffs are actually put in place, then -150bps enters the realm of possibilities again.”
Such a development would result in Canada-U.S. overnight rate spreads exceeding -225 basis points, inching closer to the historic low established in 1997. For now, with the implementation postponed, Gregory indicated that the tariffs have transitioned from a certain occurrence to a potential risk.
For now, here is a snap shot of the BoC policy rate forecasts from the Big 6 banks
For now, here is the BoC policy rate forecasts from the Big 6 banks:
Current Policy Rate: | Policy Rate: Q1 ’25 | Policy Rate: Q2 ’25 | Policy Rate: Q3 ’25 | Policy Rate: Q4 ’25 | Policy Rate: Q4 ’26 | |
|---|---|---|---|---|---|---|
 | 3.00% | 3.00% | 2.75% | 2.50% | 2.50%* | |
 | 3.00% | 2.75% | 2.75% | 2.25% | 2.25% | 2.25% |
 | 3.00% | 2.75% | 2.50% | 2.25% | 2.25% | 2.75% |
 | 3.00% | 2.75% | 2.25% | 2.00% | 2.00% | |
 | 3.00% | 3.00% | 3.00% | 3.00% | 3.00% | 3.00% |
 | 3.00% | 3.00% | 2.75% | 2.50% | 2.25% | 2.25% |
* Assumes no U.S. tariffs. Expected policy rate of 1.50% in the event of tariffs.
Information as of February 4, 2025
