Canada received a temporary reprieve from U.S. tariffs for at least 30 days, but if enacted, BMO warns the Bank of Canada may be forced to cut its policy rate to 1.50% by year-end.

That would be a full 100 basis points (one percentage point) lower than BMO’s current forecast, which expects the Bank of Canada’s rate to hit 2.50% by later this year.

BMO released its updated forecast based on the implementation of U.S. tariffs—20% on most Canadian goods and 10% on oil and gas—which were originally set to take effect today. However, at the eleventh hour, President Trump announced a 30-day delay, extending a similar deal previously made with Mexico.

BMO economist Michael Gregory told Canadian Mortgage Trends that if tariffs do eventually take effect, a more aggressive rate-cutting cycle could be back on the table.

“If tariffs are actually put in place, then -150bps enters the realm of possibilities again,” he said.

This would push Canada-U.S. overnight rate spreads beyond -225 bps, approaching the “all-time extreme” set in 1997, he added.

In the meantime, however, with any action now being postponed, Gregory said the tariffs “have shifted from being an essential certainty to now being a risk.”

BoC policy rate forecasts from the Big 6 banks

Tariffs could justify emergency Bank of Canada rate action

Believing tariffs were imminent, economists at National Bank made said there was a “strong argument” for an emergency or larger-than-usual rate cut.

“To lessen the fallout on Canada’s real economy and to simultaneously buttress financial conditions, we believe there would be a strong argument for an emergency or inter-meeting interest rate cut by the BoC,” they wrote, pointing out that a policy rate of 3% is still in the upper half of the assumed neutral range of 2.25% to 3.25%.

Beyond this immediate action, the bank also predicted that scheduled cuts in March and April, totalling 25 basis points each, could bring the policy rate down to 2.00% by spring.

Beyond affecting the Bank of Canada’s rate-cutting path, tariffs are expected to put significant pressure on the Canadian dollar and economic growth, with some warning they could push the economy into recession. Experts also highlight the risk of inflationary pressures if tariffs persist.

However, all of this remains speculative and hinges on what happens over the next 30 days.

As part of the deal to delay tariffs, Canada has pledged to step up efforts on border security and the flow of fentanyl by working closely with U.S. officials. This includes expanding its $1.3-billion border protection plan, listing cartels as terrorist organizations, and launching a new cross-border task force.

Canada is also committing an additional $200 million to fight drug trafficking and appointing a fentanyl czar to lead the charge.

This article was written for Canadian Mortgage Trends by: