04:27 PM EST, 02/07/2025 (MT Newswires) -- While a "begger-thy-neighbour, GDP-destroying, inflation-sparking" trade war has seemingly been placed on hold, it does not permit a full reversion to pre-tariff thinking, National Bank said Friday in its 'Monthly Fixed Income Monitor' for February 2025.

"For Canada," the bank said, "immense policy uncertainty is an unwelcome headwind for an underperforming economy. Investment and spending are apt to be negatively impacted, leading us to mark down 2025 growth prospects. Put differently, Canada looks to be robbed of some of the pick-up that might have otherwise accrued in the wake of aggressive Bank of Canada rate cuts."

National noted the BoC favoured an "up-tempo approach" to policy relief last year, out cutting major advanced economy central banks. The BoC's first decision of the year took the overnight target lower still. "Having pushed decisively, the base increasingly matters," National Bank said, noting that at 3%, the target is close(r) to the middle of the neutral band. "This implies less urgency. Back-to-back months of robust hiring and unexpected heat in core CPI likewise support graduality. There are nonetheless mixed signals and we see the balance of economic risks tilted to the downside. A continuation of sub-potential growth and the likely return of soft(er) labour market conditions argue for an overnight setting at the low end of the neutral range."

In short, National still sees a case for a 25 bp BoC rate cut on March 12, while acknowledging that much will be learned before then, including on tariffs. In all, 75 bps of cumulative BoC easing (vs. current) would leave overnight at 2.25% by Q3. "Beyond tariffs," National said, "Canada's own political landscape could be recast, where prospective policy adjustments would need to be controlled for. Various tariff-proofing initiatives, including a renewed push on inter-provincial trade, bear scrutiny. Assuming tariffs are on hold and no further momentum is lost, we envision the BoC holding at 2.25% through the first half of 2026. This near-stimulative level would be appropriate for a time given the slack that remains to be taken up."

Meanwhile, National said 'resilience' remains the watchword in the U.S., even if Americans are themselves coming face-to-face with political uncertainty. It added: "Ample jobs, firm(ish) growth and mounting inflation expectations forced markets to scale back easing expectations. Absent a near-term weakening in the labour market, there's unlikely to be much urgency in re-starting FOMC rate cuts." Nonetheless, National's baseline forecast (incorporating a moderation in growth), envisions 75 bps of cuts this year. National sees this easing re-commencing around mid-year with fed funds upper closing 2025 at 3.75%. The bank said it follows that the wide divergence in Canada-U.S. policy rates is to be sustained, perhaps accentuated in the near-term. "The story could be somewhat different later in the year and into 2026, though relative risks keep an ample premium on Canadian rates through our forecast horizon," it added.