3/5/2025
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Posted in Interest Rates by Vanguard Realty | Back to Main Blog Page
Five-year Government of Canada bond yields plunged and odds of multiple Bank of Canada rate cuts in the coming months soared as Donald Trump’s tariff war sent financial markets into a tailspin on Tuesday.
The president’s decision to push ahead with huge tariffs against Canada and Mexico sparked a fierce retaliation by the Canadian federal government and a stinging rebuke by Canadian prime minister Justin Trudeau.
Those five-year government bond yields – which lead fixed mortgage rates in Canada – had slid to 2.63% at time of writing, down from about 2.87% in mid-February, while major banks including Royal Bank of Canada (RBC) and Bank of Montreal (BMO) said deeper central bank rate cuts than originally expected were a distinct possibility in the months ahead.
Trudeau accused Trump of targeting a “total collapse” of Canada’s economy to allow the US to take over its northern neighbour as the tariffs and Canadian countermeasures came into effect.
Bank of Canada set to act more aggressively as tariffs take hold
RBC chief economist Frances Donald and assistant chief economist Cynthia Leach said the tariffs would likely spur the Bank of Canada into more rate cuts than it initially planned unless the US government decides to reverse its decision.
“Without tariffs, we expected the BoC to gradually cut rates to 2.25%,” they wrote on Tuesday. “Now, we expect that the longer tariffs remain in play, the greater the likelihood that rates fall faster and by a larger magnitude.”
They also highlighted further Trump measures against Canada scheduled to come into play in the weeks ahead: tariffs on steel and aluminum, set to arrive on March 12, and Trump’s threatened reciprocal measures on April 2.
BMO’s chief economist Doug Porter, meanwhile, said the bank now expects BoC decisionmakers to trim the benchmark rate to 2% by July in a series of quarter-point cuts in the next four announcements.
Odds of a recession are also inching upwards. RSM Canada economist Tu Nguyen said price increases, an unemployment jump, and consumer pullback were all likely in the months ahead, according to Bloomberg, while former Bank of Canada governor Stephen Poloz has already emphasized what he sees as the underlying weakness of the Canadian economy.
Uncertainty continued on Tuesday afternoon as Howard Lutnick, Trump’s commerce secretary, suggested the president may consider rolling back some of the measures against Canada and Mexico tomorrow.
Source: Canadian Mortgage Professional
Bank of Canada Benchmark Rate, Canada Living, Interest Rate Forecast, Interest Rates
