Economic Uncertainty Looms as Canada’s Central Bank Weighs Rate Cuts
As the world watches, the Bank of Canada is poised to make a crucial decision on interest rates, with a majority of economists predicting a 25-basis-point cut to 3.00% on January 29. This move would mark a significant step in the bank’s aggressive rate-reduction strategy, which has seen a cumulative 1.75 percentage-point decrease since June 2024.
A Neutral Rate in Sight
The central bank’s goal is to reach a neutral rate that neither stimulates nor restricts the economy. With the current rate already close to this target, the question on everyone’s mind is: what’s next? The answer lies in the uncertain landscape of international trade, particularly with regards to threatened U.S. tariffs on Canadian imports.
Tariffs and Trade Tensions
The looming specter of U.S. President-elect Donald Trump’s tariffs, potentially as high as 25%, has economists on edge. While some better-than-expected data on inflation and jobs has provided a glimmer of hope, the impact of these tariffs remains a significant unknown. As Derek Holt, head of capital markets economics at Scotiabank, notes, “If Canada gets hit with large tariffs and we don’t retaliate, the disinflationary effects would likely prompt considerably more easing by the BoC.”
Forecasting Challenges
Economists are struggling to factor in the effects of potential tariffs on their forecasts, making it difficult to predict rates beyond the upcoming meeting. The uncertainty is palpable, with many acknowledging that the outlook will depend on how relations with the United States develop in the coming weeks and months.
A Rate Cut Consensus
Despite the uncertainty, a clear majority of economists (80%) expect a quarter-point rate cut on January 29, with some predicting further cuts in March and beyond. The median forecast suggests the overnight rate could drop to 2.50% by the end of the quarter, below what interest rate futures are currently pricing.
Inflation and Growth Projections
Canadian inflation is expected to remain within the Bank of Canada’s target range of 1-3% over the coming quarters, averaging 2.1% this year and 2.0% next. The economy is forecast to grow 1.8% this year and 1.9% next, faster than the 1.3% growth seen in 2024.
A Wait-and-See Approach
As the Bank of Canada navigates these uncharted waters, one thing is clear: the next few weeks will be crucial in determining the direction of interest rates and the overall health of the Canadian economy.
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