There are more than enough reasons to think the Bank of Canada will be forced to lower its key lending rate, which impacts interest rates, more deeply and quickly than previously thought. The biggest threat to the Canadian economy right now is U.S. President Trump’s barrage of tariffs, which has sent global stock markets reeling.
What’s Happening to the Stock Market?
Since President Trump announced his global trade war on April 2, the Dow Jones Industrial Average, Nasdaq, and S&P 500 have all fallen into correction territory. In just two trading days, the S&P 500 registered its steepest drop on record.
Wall Street’s most widely known measure of volatility, the Cboe Volatility Index, or VIX, is trading at 48, its highest level since global stocks sold off last August. That reading is also the second highest since the 2020 health crisis. To put that number into perspective, since 1990, the average daily close for the VIX has been around 19.50.
The TSX, meanwhile, is down more than 8% since April 2 and is down 12% since hitting a record-high in late January.
Of particular note, crude oil is down to around $60 per barrel, the lowest level in four years. Oil has taken a hit over concerns that a global trade war could result in a worldwide recession, which would mean less near-term demand for oil and gas.
It’s important to watch crude oil prices; the energy sector accounts for approximately 18% of the S&P/TSX Composite Index. It’s also responsible for approximately 10% of nominal gross domestic product (GDP). A hit to crude oil prices could have a serious impact on the Canadian economy.
How Will the Bank of Canada Respond?
To be fair, a falling stock market doesn’t necessarily mean the Canadian economy is doing poorly. However, there are indications that the Canadian economy is weakening. According to the latest data from Statistics Canada, the labour market unexpectedly lost 33,000 jobs in March. That’s the worst reading in three years and below a predicted gain of 20,000 jobs.
The big job losses come at a time when advanced GDP data suggests the Canadian economy faltered in February. That economic uncertainty is taking its toll on Canadian consumer confidence too, which is now at historic lows, as well as business confidence.
Lower GDP, big job losses, cratering consumer & business confidence, and lower commodity prices, coupled with the ongoing trade war with the U.S. could force the Bank of Canada to step in and lower interest rates more quickly and deeper than many thought it would.
The Bank of Canada has already cut its key lending rate seven consecutive times since July 2024, from 5.00% to 2.75%. But it may need to cut it a lot lower to support stalling consumer and business confidence.
How far and fast? This could result in the Bank of Canada taking its policy rate down to 2.0%. That would suggest three more 25-basis-point interest rate cuts in 2025. The Bank of Canada next meets on April 16, and the odds of a 25-basis-point interest rate cut have ramped up significantly since President Trump unveiled his so-called reciprocal trade war on April 2.
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