Trade tensions cast a shadow over economic outlook
The Bank of Canada is preparing to announce a 25-basis-point cut to its key interest rate today, bringing it to 3%, but experts suggest this could be the only rate cut of the year.
According to a report from Financial Post, economists at the Bank of America foresee the central bank adopting a cautious approach after this initial reduction. “We expect the forward guidance to signal a pause as the BoC waits to see how both domestic activity and US trade policy play out,” said Carlos Capistran and his team of economists.
The report noted their outlook is shaped by improving economic conditions in Canada, with inflation remaining under control and a stronger-than-expected jobs report for December signalling resilience in the labour market.
This stance contrasts with market speculation, which predicts two rate cuts from the Bank of Canada this year. However, Capistran’s team argues that core inflation, while stable, is unlikely to drop further as the economy recovers. Additionally, the economists noted that Canada’s central bank will likely monitor how the Federal Reserve in the US proceeds with its rate policies, as significant divergence could weaken the Canadian dollar.
External risks loom
Trade tensions remain a critical factor in the Bank of Canada’s decision-making process, experts noted. A significant wild card is the potential imposition of tariffs by US president Donald Trump. Trump has recently renewed threats of 25% universal tariffs targeting Canadian industries, including a possible duty on automobiles. Economists warn that such measures could plunge Canada into a recession, forcing the central bank to consider additional rate cuts to stabilize the economy.
In its base-case scenario, the Bank of America assumes no new tariffs will be imposed but acknowledges the “continuous looming threat” of trade barriers. Should the tariff situation escalate, economists predict the Canadian dollar could weaken substantially, possibly falling to 64.51 cents US. However, if the trade environment remains stable, the loonie could strengthen to around 71 cents US.
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