(Bloomberg) — 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 US said will take effect Tuesday.
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While a one-month reprieve for Mexico from US 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 has plummeted, reaching levels nearly 180 basis points lower than its US 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% odds of additional easing, via either a half-point cut on March 12 or an intermeeting 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% 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 3% on Jan. 29 — Canadian short-term bond yields tumbled. The two-year note’s fell nearly 20 basis points to a low of 2.45%, last seen in 2022.
With US 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% 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. US President Trump’s 25% tariffs on most goods from Canada and retaliatory actions by Canadian Prime Minister Justin Trudeau will trim real gross domestic product growth by 2 to 4 percentage points, they estimate.
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