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The Bank of Canada (BoC) is likely to join the US Federal Reserve in cutting interest rates this year to deal with the fallout from rising trade tensions, according to trading in the swaps market.
Investors are betting that Canadian policymakers will follow an expected US rate cut in September. The chances of BoC cutting rates at its Oct. 30 meeting reached above 50% on Tuesday, up from about 25% last week, according to data compiled by Bloomberg.
Traders are increasing their bets on a rate cut even as economic data signal that the economy is showing signs of recovery from a first-quarter slowdown. The median consensus of analysts expects that the benchmark rate will remain at 1.75% this year.
“The data for Canada is unfolding in a manner about as expected, but the medium-term outlook has definitely been impacted by trade/tariff developments of late,” said Mark Chandler, head of fixed income research at Royal Bank of Canada. “Most of the fear surrounds the potential impact on the US factory sector. Analysts have not fully incorporated this into their forecasts, I believe, because of a belief that the tariffs may yet be avoided.”
The chances of a cut increased after US President Donald Trump threatened to impose tariffs on Mexican products to curb illegal immigration, raising concerns about the ratification of the revised North America Free Trade Agreement.
On Tuesday, Fed Chairman Jerome Powell showed an openness to cut rates if necessary, pledging to keep a close watch on the fallout from a deepening set of disputes between the US and its largest trading partners. Investors have aggressively raised bets that the Fed will cut rates by 89% as soon as September, according to Bloomberg data.
“If over the coming weeks there is no improvement, you might see more analysts believing that rate cuts in the US — and maybe Canada — are more likely,” Chandler said.
