Potentially inflationary measures could give central bank pause for thought, says report
A new report from TD Economics suggests that planned federal and provincial rebate cheques could lead the Bank of Canada to slow its current rate-cutting cycle through 2025.
The rebates, expected to provide millions of Canadians with additional disposable income this spring, could prompt adjustments to the central bank's monetary policy. The report highlights the potential impact of these payments on Canada’s economy.
James Orlando, director of economics at TD Bank, said in that the Bank of Canada’s rate cuts have been aimed at stimulating a weak economy – but fiscal measures such as government rebates could alter its approach.
“As the economy is stronger because the government’s stepping in to provide stimulus of its own, then maybe the Bank doesn’t need to cut rates as much as it otherwise would have,” said Orlando.
The federal government’s cheques, alongside a separate $200 payment from the Ontario government, are expected to influence consumer behaviour. Orlando predicts that roughly half of recipients will use the funds to save or pay down debt, while the other half will spend, injecting money into the economy.
Based on these forecasts, TD Economics has revised its outlook, now anticipating one fewer rate cut than initially projected. The Bank of Canada is still expected to implement a 25-basis-point rate cut in December and possibly another in January. However, beyond these adjustments, a slower pace of cuts may emerge.
Orlando described a potential “probing period” in which the bank evaluates economic responses between cuts, possibly reducing rates by 25 basis points every other meeting. TD forecasts the policy rate to stabilize at 2.50% by the end of 2025.
The report also acknowledges uncertainty surrounding external factors. A proposed 25% tariff on Canadian goods by US president-elect Donald Trump could disrupt economic forecasts, with Orlando warning that such tariffs could push economic growth into negative territory, though this is currently speculative.
Orlando remains optimistic about negotiation outcomes, suggesting less severe measures are more likely. “This is the worst case outcome, and it’s also not the baseline outcome for any economist right now. It’s just something we’re watching and we’re hoping cooler heads will prevail,” he said.
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