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The picture on Canadian tariffs is in a high state of flux right now with the market strongly suspecting they will be called off later today, or delayed.
There are many moving parts here but CIBC is outlining a scenario where tariffs are placed today but are lifted at the end of June. That would take 2025 GDP growth in Canada down to 0.7% from their current forecast of 1.8%.
It would see 0.2% growth in Q1 followed by a 2.4% annualized contraction in Q2. The lifting of the tariffs would see a +3.2% pace of growth in Q3 and Q4.
Also note the 2026 CPI forecast, which falls to just 1.3%.
While we would favour a monetary policy easing as part of the initial response, our existing call for a 2.25% overnight rate
by the end of Q2 [from 3.00% currently] may be all we see from the Bank of Canada if the tariffs end at that point. The Governor appeared to be
concerned about feeding into inflation expectations with a more aggressive stance. Should tariffs persist beyond Q2,
recession-style job losses and the reduction in spending power would put enough downward pressure on prices to cancel
out the initial upside, and thereby leave the Bank of Canada an easy decision to ease rates more aggressively. It’s hard to
believe that inflation expectations would shoot higher with significant slack in the economy and so much uncertainty
looming over Canada’s long-run growth prospects. It would take a lot of fiscal stimulus to substitute for monetary policy,
and a combination of accommodative rates and targeted fiscal support would likely be part of the response.
They see USD/CAD rising to 1.50 in this scenario but would recover ‘some’ of its lost ground in the subsequent quarters.
USD/CAD daily