Toronto-Dominion considers the recent Bank of Canada’s rate cut as a protective measure against risks associated with prolonged tariffs, which may negatively impact the Canadian economy. Despite recent resilient data, the central bank has adjusted its outlook to reflect the effects of increasing trade tensions.
TD’s revised forecast predicts a mild recession, with Canadian exporters facing an effective tariff rate of 12.5% over the next six months, a substantial rise from under 2%.
Cautious Approach By The Bank
In this context, TD anticipates that the Bank of Canada will maintain a cautious approach as tariff pressures continue.
While the bank expects the overnight rate to reach 2.25% by June, it foresees limited potential for further cuts to manage inflation expectations amid ongoing economic uncertainty.
This analysis suggests that policymakers acted preemptively to counter expected downturns linked to higher trade barriers. While recent indicators pointed to economic resilience, the central bank has reassessed its projections to account for the mounting toll of tariffs. The move appears tactical, aiming to stabilise domestic demand as external headwinds intensify.
The forecast from McKay’s team now outlines a mild economic contraction, with trade-dependent industries bearing the brunt of additional costs. The projected tariff increase to 12.5% places extra pressure on exporters, raising costs for firms that rely on cross-border commerce. Compared to levels seen earlier in the year, this shift presents businesses with a far more constrained operating environment.
Market Reactions And Liquidity Conditions
Given these conditions, the current expectation is that policy changes will proceed with a measured hand. Inflation remains a concern, and while rate reductions have been introduced, the likelihood of further adjustments appears low. Weak external demand, coupled with a cautious monetary stance, suggests that credit markets could stabilise at new levels rather than shifting aggressively in response to short-term data fluctuations.
From our perspective, this sets the stage for markets to react to shifting monetary signals with heightened sensitivity. Yield curves may adjust as traders reassess the pace of future rate moves. If domestic figures weaken in the coming weeks, pressure could mount among policymakers to reconsider their stance. However, with inflation expectations still in focus, abrupt policy moves seem improbable unless economic deterioration becomes more pronounced.
Liquidity conditions should be monitored closely, as adjustments in borrowing costs tend to filter through at an uneven pace. While some sectors may experience a swift repricing of risk, others could take longer to reflect the impact of shifting macroeconomic expectations. At present, caution remains warranted when evaluating how quickly markets will internalise changing monetary dynamics.
