📝 Expect BoC to Lower Overnight Rate to 2.25% By June: TD

The BoC is taking out insurance that tariffs will persist and put significant downward pressure on the Canadian economy. While recent strength in economic data would argue that the BoC could have elected to pause rate cuts, past outperformance won't matter much with the narrative now fully altered to incorporate a trade war. Our updated forecast will reflect a shallow recession under the assumption that Canadian exporters will face an effective tariff rate of 12.5% for at least the next six months. That's a massive overhaul from the past when it sat below 2%.

As long as the pressure on tariffs remains in place, the BoC should keep its dovish bias. We have the overnight rate getting to 2.25% by June, but see limitations in going further due to the delicate balance in managing inflation expectations. - TD

Source: Cable FX Macro Key Rates Tool