Markets Brace for Unscheduled Rate Reduction as Economic Uncertainty Mounts
As economic uncertainty intensifies due to U.S. tariff threats, speculation is growing that the Bank of Canada (BoC) may be forced into an emergency interest rate cut ahead of its scheduled March 12 meeting. While Canada has secured a temporary 30-day reprieve from President Donald Trump’s proposed 25% tariffs, financial markets remain on edge, with traders increasingly betting on imminent central bank action to cushion potential economic fallout.
Interest-rate swaps tied to the Canadian Overnight Repo Rate Average (CORRA) have fallen sharply, reflecting expectations that the BoC may deliver a larger-than-usual rate reduction. The swaps market is currently pricing in a 33-basis-point cut, indicating a strong likelihood of either a quarter-point reduction plus additional easing measures or an unexpected half-point cut next month.
Financial analysts, however, remain divided on whether the BoC will move before its next policy meeting. Jason Daw, head of North America rates strategy at RBC Capital Markets, estimates the odds of an unscheduled rate cut at 15%, emphasizing that any such move would likely be “telegraphed in some way” by policymakers in advance.
The growing speculation follows a series of six consecutive rate cuts since June, including the most recent quarter-point reduction on January 29, which brought the BoC’s benchmark rate down to 3%. Meanwhile, the yield on Canada’s two-year government bonds has dropped to 2.45%—a level last seen in 2022. The spread between Canadian and U.S. two-year bond yields has widened to 175 basis points, marking the largest gap since 1997—a signal of diverging economic conditions between the two nations.
Economists warn that a prolonged trade war with the U.S. could drag Canada into a recession. Initial projections estimate that Trump’s proposed tariffs—if enforced—could shave off between two to four percentage points from Canada’s GDP growth, placing immense pressure on the Bank of Canada to intervene swiftly and stabilize the economy.
While BoC Governor Tiff Macklem has yet to signal any immediate action, the rapidly evolving situation may force policymakers to act preemptively to counter economic headwinds. With financial markets already bracing for a possible cut, investors and businesses are watching closely to see if the central bank will step in sooner rather than later.
For now, the clock is ticking—and if U.S.-Canada trade tensions escalate further, an emergency rate cut may become inevitable.