The Bank of Canada (BoC) announced a 25 basis points (bps) rate cut today, bringing the target for the overnight rate to 2.75%. The BoC acknowledges that the Canadian economy started the year in a solid position with inflation close to the 2% target. However, heightened trade tensions with the US will likely slow economic activity and increase inflationary pressures in Canada.

CIBC Capital Markets says today’s 25 bps rate cut may only be a Band-Aid because we don’t yet know the size of the economic wound that will be opened up by US trade policies and potential tariffs. Without trade uncertainties, the BoC may have held rates today. But the forecast for business and household confidence as well as expected slower economic growth helped make the case for a rate cut.

Adam Ditkofsky, Senior Portfolio Manager, Global Fixed Income, CIBC Asset Management confirms today’s rate decision is in line with our expectations, and our  portfolios are positioned accordingly. “The rate decision makes sense given recent market volatility and indecisiveness related to President Trump’s trade war. Although it’s been challenging to navigate this environment because of President Trump’s on-again-off-again tariff comments, our views continue to reflect a risk off trade. We expect lower consumer confidence, weaker gross domestic product (GDP), lower yields and wider credit spreads—and our portfolios are actively managed with this outlook in mind.”

He confirms “we believe increased monetary stimulus is warranted in this current environment and if this rhetoric continues, we’ll likely see more rate cuts by the BoC being priced into the curve in the near term. While inflation has yet to fully normalize and remains a concern, the BoC will likely need to prioritize economic instability in the near term. Bond and stock market reactions to today’s announcement are muted as the rate cut was largely anticipated.”

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