Interest rate cut becomes almost certain as Trump confirms tariffs

  3/3/2025 |   SHARE
Posted in Interest Rates by Vanguard Realty | Back to Main Blog Page

Canadian markets have taken a hard hit as President Donald Trump confirmed that the planned 25 percent tariffs on all imports from Canada and Mexico would take effect at the end of the night. The announcement has rattled investors, leading to a steep decline in both the U.S. and Canadian stock markets, as well as a sharp drop in the Canadian dollar.

The S&P/TSX Composite Index fell nearly 400 points by mid-afternoon, reflecting widespread concerns about the economic impact of the tariffs. The Canadian dollar dropped below 69 cents U.S., its lowest level in weeks, as traders reacted to the renewed trade tensions. This downturn has significantly increased expectations that the Bank of Canada will cut interest rates at its upcoming policy meeting on March 12. Market bets on a rate reduction surged to 70 percent, up from 50 percent earlier in the day.

Speaking at the White House, Trump made it clear there would be no further negotiations. "Tomorrow—tariffs 25 percent on Canada and 25 percent on Mexico. And that’ll start," he told reporters. He framed the tariffs as part of a strategy to pressure both countries to strengthen their efforts against fentanyl trafficking into the U.S., a claim that Canadian officials have challenged.

Financial markets reacted swiftly. In the U.S., the Dow Jones Industrial Average lost nearly 800 points, while the Nasdaq Composite dropped 3 percent, driven by heavy losses in technology stocks. The S&P 500 also fell more than 2 percent, erasing its year-to-date gains. In Canada, the selloff extended across financial and industrial stocks, with major exporters bracing for the added costs of the tariffs.

Bond markets also reflected growing concerns about economic instability. The yield on the U.S. 10-year Treasury note declined by 3.2 basis points to 4.197 percent, as investors sought safer assets amid the uncertainty.

Economic data released earlier in the day provided further cause for concern. A key U.S. manufacturing index declined, with the Purchasing Managers' Index slipping to 50.3 in February from 50.9 in January. The new orders index showed an even sharper drop, falling to 48.6 from 55.1, raising fears of slowing economic growth.

In Canada, businesses are increasingly worried about rising costs and supply chain disruptions. Analysts warn that if the tariffs remain in place for an extended period, they could have lasting consequences for Canadian exporters, particularly in the auto, technology, and agricultural sectors. Some economists suggest that companies may begin adjusting supply chains away from the U.S., reducing investment in export-driven industries.

With financial pressures mounting, attention is turning to the Bank of Canada. Traders are now assigning a 70 percent probability to a rate cut at the central bank’s next meeting. Lowering interest rates would help stimulate the Canadian economy by making borrowing cheaper and easing financial conditions, but it could also pose risks if inflation remains persistent. The Bank of Canada has been cautious about rate cuts, but the tariffs and the weakening Canadian dollar could push policymakers to act sooner than expected.

The U.S. Federal Reserve is also facing pressure to consider rate cuts, with traders expecting at least two reductions by the end of the year. However, additional inflationary pressures from the tariffs could complicate those expectations.

As the Canadian government assesses the fallout, there is growing pressure on Prime Minister Justin Trudeau to respond. In past trade disputes with the U.S., Canada has imposed retaliatory tariffs on American goods, and similar measures may be considered if the new tariffs remain in place. The government is expected to consult with business leaders and trade officials in the coming days to determine its next steps.

For now, markets remain volatile, and uncertainty surrounding North American trade relations continues to drive speculation over how central banks will respond. The Bank of Canada’s next move is now at the centre of attention, with many watching closely to see whether policymakers take action to cushion the economic blow from Trump’s latest tariff escalation.

Source: Canadian Mortgage Professional

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