Morgan Stanley Now Sees Bank of Canada Cutting Rates Twice in 2025 Vs Earlier Forecast of Three Reductions

Morgan Stanley said it now expects the Bank of Canaa to cut rates by 25bps at its July and October meetings to reach 2.25% by year-end, where it sees it to remain for the rest of the year.

The bank was estimating three 25bp cuts in April, July and October and terminal rate of 2.00% before.

Morgan Stanley's rationale for further cuts includes:

—Rising economic uncertainty: Survey data suggest that households and businesses are taking precautions over

Canada-Unitedd States trade tensions. Households expressed worries about job security, while firms showed concern about sales outlooks, and intend to scale back their hiring and investment plans. This points to heightened downside risk to growth if these trade tensions persist for an extended period. In addition, trade policy uncertainty continues to cast a shadow over the labor market, as trade-oriented sectors continue to feel the impact of evolving geopolitical risks;

— Lingering trade policy uncertainty: Although prolonged, widespread tariffs are still not in the bank's baseline, Morgan Stanley thinks that further cuts make sense from a risk-management perspective as lingering trade uncertainty weighs on the economy.

The bank acknowledged that a risk to its view is that as the policy rate has moved further into the 2.25%-3.25% neutral range, the BoC could still cut rates at an even slower pace versus its revised baseline. Morgan Stanley also flagged the risk that cuts could be pulled forward if things deteriorate faster-than-expected.

Nonetheless, the bank remaisn attentive to newsflow around trade and the incoming economic data.

Contrary to Morgan Stanley's expectations of a low conviction 25bps cut, the BoC decided to keep its policy rate unchanged at 2.75% on Wednesday. The decision to hold comes as the BoC decided to "gain more information about both the path forward for US tariffs and their impacts."

Canada's central bank refrained from providing forward guidance due to the heightened level of uncertainty stemming from U.S. trade policy, and instead reiterated that it would "proceed carefully" as it pays "particular attention" economic risks.

Governor Tiff Macklem cautioned that the BoC will be less "forward-looking" than usual until it gets more clarity over the situation, but is ready to act "decisively" if the data "clearly point in one direction."

Morgan Stanley recommended investors to enter short positions. The BoC's main message was that it can't provide any guidance nor single forecasts given the "pervasive uncertainty." The Governing Council repeated that "monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war."

This elevated level of uncertainty is consistent with the bank's view that risk-sensitive currencies, like the Canadian dolalr (CAD or loonie), will underperform, while safe-haven and European currencies, including the Swiss franc (CHF), have room to strengthen further.

Recent resilience in CAD from U.S. tariff exemptions also provides room for CAD to weaken more in line with other risk-sensitive currencies, added Morgan Stanley.