‘A tale of two economies’: Experts react to latest BoC rate cut

Panellists Earl Davis, Ed Devlin and Warren Lovely share their analysis on the BoC's rate decision amid economic volatility.

The Bank of Canada cut its key interest rate as expected by 25 basis points on Wednesday, and experts say that was the right decision for the Canadian economy, which may soon be hit hard if U.S. President Donald Trump follows through on his tariff threats.

The central bank cut its overnight rate from 3.25 per cent to three per cent Wednesday morning, noting in its decision that economic projections are subject to “more-than-usual uncertainty” due to Trump’s threat to place 25 per cent tariffs on Canadian goods as soon as Saturday.

“Who doesn’t like round numbers? We’ve moved from five per cent at its peak to three per cent now, that’s 200 basis points in six meetings,” Warren Lovely, chief rates strategist at National Bank of Canada, told BNN Bloomberg in a Wednesday panel discussion.

“That’s a faster tempo to interest rate relief in Canada than almost anywhere on the planet, reflecting what has been a pretty significantly underperforming economy, and now one that faces, as the Bank of Canada’s just outlined, a pretty serious economic threat.”

• Read the full text of the Bank of Canada’s latest interest rate decision

Ed Devlin, founder of Devlin Capital and a Senior Fellow at the C.D. Howe Institute, said in the panel discussion that he thinks the Bank of Canada deserves credit for its aggressive maneuvering since it kicked off its current easing cycle in June of last year.

“I’m still in the camp that the biggest risk that we face is deflation and going back to zero per cent interest rates in a very negative economic environment and we kind of run out of bullets,” he said.

“So, we had to move up aggressively and they moved up aggressively – I give them kudos for that. Now they are moving down aggressively, and I give them kudos again for that, and I would encourage them to keep doing that.”

Devlin argued that the bank should continue lowering rates until they are closer to the bottom end of its neutral range – between 2.25 per cent and 3.25 per cent – in order to stimulate activity in Canadian markets.

Lovely noted that south of the border, the economic backdrop is more positive, and the growing divergence between interest rates in Canada and the U.S. will continue to impact financial markets and the Canadian dollar.

• Canada-U.S. interest rate gap widens, but BoC more focused on tariffs: experts

“We really do have a tale of two economies here, one characterized by resilience in America, and one characterized by underperformance and a massive, outsized shock that is perhaps right in front of us,” he said.

“So, it’s hard to be too constructive on the Canadian dollar here in my opinion and you really do see significant, and I think quite lasting, divergence in interest rate policy between the Bank of Canada and the U.S. Federal Reserve, and that’s no tonic for the Canadian dollar.”

Tariffs and the Trump Trade

Earl Davis, head of fixed income and money markets at BMO Global Asset Management, said in the panel discussion that despite the divergence between the American and Canadian economies, growth in the U.S. ultimately benefits Canada.

“Seventy-five per cent of our trade is with the U.S., so if the U.S. is doing well, we’ll do well. We’re just talking about tariffs, but the net impact on Canada is the impact of tariffs plus the impact of more growth in the U.S.,” he said.

“Because remember, if the tariffs come, we’re going to have a cheaper Canadian dollar, so increased growth in the U.S. is actually beneficial for us and our employment (levels).”

• Lutnick says Mexico, Canada can avoid tariffs with border action

Devlin added that Trump’s tariff rhetoric and the unpredictable nature of his policy proposals has many market participants struggling to guess his next move, but he said there’s one group of stakeholders the U.S. president likely wants to keep happy: equity investors.

“People say Trump has no guardrails and I would disagree with that. I don’t think it’s opinion polls because he doesn’t need to be re-elected, I don’t think it’s Congress – he doesn’t care – or the Senate… it’s the S&P 500 (Index),” he said.

“I think he is more attuned to the equity markets, not the bond market by the way, he cares about the stock market. And if his tariffs or his trade policies or economic policies cause the stock market to tank, look for him to reverse them.”