09:05 AM EDT, 03/11/2025 (MT Newswires) -- Financial markets now seem very confident that the Bank of Canada will cut interest rates by another 25 basis points to 2.75% when it announces its decision on Wednesday, said Commerzbank.

Shortly after the last cut at the end of January, it wasn't clear whether there would be another cut on Wednesday, wrote the bank in a note to clients. The Canadian real economy appears to be recovering somewhat, although Friday's weaker-than-expected employment report suggests that the recovery is likely to be bumpy.

With inflation recently showing signs of stabilizing at acceptable levels, meaning that the risk of the BoC undershooting its inflation target has diminished, there was a strong case for keeping rates unchanged at Wednesday's meeting, stated Commerzbank.

As to why markets are pricing in another rate cut despite the progress in the real economy and on the inflation front, the bank pointed out this probably has a lot to do with what is happening in the United States and the tariff announcements.

It's true that this time the bulk of the tariffs were delayed for almost a month, two days after they came into effect. But again, the Mexican tariffs were the first to be delayed, followed by the Canadian tariffs. On Friday, President Donald Trump again toyed with the prospect of reciprocal tariffs on Canadian exports to the U.S.

Apparently, Trump finds it easier to work with his southern neighbor than with his northern neighbor, added Commerzbank. Markets are now expecting the BoC to respond to these tariff concerns with another rate cut in order to cushion any negative impact on the real economy at a time when it's only just recovering.

In principle, the bank can understand this argument. The Canadian economy is very dependent on its U.S. counterpart, and the prospect of Canadian counter-tariffs is likely to exacerbate the problems for the real economy.

However, cutting rates too much could be problematic. The BoC may now be in the range where the neutral rate is. The tariffs are more likely to increase inflation risks in Canada than to reduce them.

A rate cut Wednesday is priced in, but if the BoC responds to the tariff risks with further rate cuts, the Canadian dollar (CAD or loonie) is likely to suffer because the inflation risks haven't gone away, according to Commerzbank.