Bets rise for an emergency rate cut by Bank of Canada
Traders of Canadian short-term interest rates have begun to price in meaningful odds
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Traders of Canadian short-term interest rates have begun to price in meaningful odds of an emergency cut by the Bank of Canada to blunt the economic impact of tariffs the United States said will take effect Tuesday.
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While a one-month reprieve for Mexico from U.S. tariffs on Monday led to a partial reversal in anticipation Canada also may avoid them, interest-rate swaps linked to the Canadian overnight repo rate average, or CORRA, sustained steep declines. At the same time, Canada’s two-year yield plummeted, reaching levels nearly 180 basis points lower than its U.S. counterpart, the widest margin since 1997.
For the central bank’s next meeting on March 12, the related swap contract prices in 33 basis points of easing — a quarter-point cut plus an extra eight basis points. The extra equates to about 30 per cent odds of additional easing, via either a half-point cut on March 12 or an inter-meeting move before then.
“A ‘surprise’ inter-meeting cut is a non-zero chance, but a low probability in our opinion,” Jason Daw, head of North America rates strategy at RBC Capital Markets, said in a note. The bank puts the odds at about 15 per cent and expects that “an inter-meeting cut would be telegraphed in some way.”
Consistent with higher expectations for additional Bank of Canada rate cuts — following six since June, most recently a quarter-point reduction to three per cent on Jan. 29 — Canadian short-term bond yields tumbled. The two-year notes fell nearly 20 basis points to a low of 2.45 per cent, last seen in 2022.
With U.S. two-year yields having risen in anticipation of a more cautious path by the Federal Reserve in response to inflation trends, to as much as 4.28 per cent Monday, the yield differential increased to about 175 basis points, the biggest since 1997.
Economists predict a tariff war would put the Canadian economy into a recession. U.S. President Donald Trump’s 25 per cent tariffs on most goods from Canada and retaliatory actions by Canadian Prime Minister Justin Trudeau will trim real gross domestic product growth by two to four percentage points, they estimate.
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