The Bank of Canada (BoC) may need to "tread a bit more cautiously" on interest rate cuts in light of Donald Trump's victory in the U.S. presidential election and a consequent rise in uncertainty, economists and experts say.
Trump's win has already been resonating through global equity and currency markets, and the potential impact of his future policies on the loonie, trade, inflation and U.S. and Canadian productivity could create a more challenging landscape for the BoC to navigate.
"The BoC slashed policy rates 50 bps in October," a team of BMO economists, led by chief economist Douglas Porter, wrote in a paper published Wednesday, "but a more cautious path of 25 bp moves over the coming months is more sensible given the post-election uncertainty and heightened risk to the Canadian dollar."
That uncertainty will likely make the BoC's path forward much less clear, says Moshe Lander, a senior lecturer in economics at Concordia University, in an interview with Yahoo Finance Canada.
"The thing with a Trump presidency is that it's hard to predict," Lander said. "He's unpredictable, and so we can't even necessarily use eight years ago when he was elected as a template, because at least then, he was surrounded by more of the traditional old-guard Republicans."
The BoC has already been dealing with a widening interest rate gap between its overnight rate and that of the Federal Reserve, a situation that tends to make the loonie weaker. In the wake of the election, the U.S. dollar has gained against a range of currencies, including the loonie, and that trend could continue, Scotia Capital analyst Hugo Ste-Marie says in a note to investors.
"The Trump election suggests the interest rate differential between the Fed and the BoC, which is already wide by historical standards, could widen even more, sending the loonie lower (not higher)," Ste-Marie wrote.
The loonie-USD exchange rate is not the BoC's responsibility, Lander says, except that if the loonie drops far enough, the effects can be inflationary. "If the Canadian dollar falls too low, then presumably this becomes a very attractive opportunity to buy Canadian goods and services," he said. "And so if you have a huge increase in foreign demand for Canadian goods and services, then at some point it eventually triggers inflation."
A potential tariff on Canadian exports -- a seeming priority for Trump -- is yet another unknown, BMO's economists write. "Increased uncertainty about tariffs and the fate of the [U.S.-Mexico-Canada Agreement] ahead of the 2026 review could depress capital flows to Canada and weaken domestic investment, likely extending the nation's productivity slump," the paper said.