Economists expect the Bank of Canada (BoC) to deliver another interest rate cut on Wednesday as the country’s economy grapples with U.S. President Donald Trump’s on-again, off-again 25% tariffs.

“For several weeks, we’ve expected the BoC to deliver a 25-basis-point (bps) cut to take out insurance against a trade-war escalation, despite the domestic economy running at a decent clip,” wrote Marco Ercolao, a Toronto-Dominion Bank economist, in a client note provided to Connect.

“Indeed, market pricing is aligned with our call, now predicting a 90% chance of a 25-bps rate cut, up from only 30% a couple weeks ago.”

BoC Governor Tiff Macklem has stated on several occasions that monetary policy cannot prevent trade disruptions. The bank’s continued rate cuts are occurring at a time when many economists had expected the bank to begin holding rates after six consecutive cuts that lowered the key overnight lending rate to 3%.

Now, the BoC is seeking to offset the effects of the U.S.-Canada trade war as best it can as prolonged uncertainty looms.

“It’s a very difficult position for the Bank of Canada to be in,” said Randall Bartlett, deputy chief economist at Desjardins Group, told the Canadian Press.

While U.S. President Donald Trump imposed sweeping tariffs on Canadian goods on March 4, the exact scope of those tariffs has since fluctuated due to temporary pauses and amendments.

“Who knows what this could look like from day-to-day? It’s almost anyone’s guess,” Bartlett told CP.

On Tuesday, Trump vowed to increase steel and aluminum tariffs to 50% because Ontario Premier Doug Ford invoked a 25% levy on the province’s electricity exports to Michigan, New York and Minnesota. Ford then backtracked on the plan, telling reporters that U.S. Secretary of Commerce Steve Lutnick had “sent out an olive branch” by inviting federal and provincial officials to meet in Washington on Thursday to discuss Trump’s tariff threats.

The White House confirmed later Tuesday that the government will only impose the the original 25% tariffs on steel and aluminum.

Economists warn that if the trade war drags on, Canada could slide into a recession by mid-year. Inflation is expected to rise due to supply disruptions, while job losses could mount in affected sectors unless some industries secure tariff reprieves.

The Canadian economy had been showing signs of recovery heading into 2025 as the series of BoC cuts spurred consumer spending and inflation fell to the bank’s 2% target range. Bartlett said the central bank appeared ready to pause its easing cycle.

“But then obviously we got hit with the tariff shock on March 4 and all bets are off in terms of what that means … for the Bank of Canada,” he said.

Prior to the tariff announcement, expectations for a hold or a cut were evenly split.

In Macklem cautioned that if tariffs are broad and long-lasting, “there won’t be a bounceback” similar to the post-pandemic recovery.

According to CP, Andrew Grantham, senior economist with CIBC Capital Markets, said in a note to clients that while rate cuts cannot resolve the tariff issue, they can help ease economic turbulence. CIBC anticipates a quarter-point cut Wednesday and more reductions later if trade uncertainty persists.

Bartlett also expects a 25-bps reduction but warns that the BoC will be limited in how much further it can lower rates, CP reported. A widening gap between Canadian and U.S. interest rates could weaken the loonie, exacerbating inflation on imported goods.

“If the Bank of Canada drops its policy rate too sharply, the loonie could fall as well, leading to a bigger surge in inflation on food and other goods imported from the U.S.,” he told CP.

Pictured: Bank of Canada Governor Tiff Macklem

Photo: University of Toronto