Central bank is scheduled to announce latest move on January 29
As the Bank of Canada approaches its first interest-rate decision of 2025, economists are grappling with a mix of inflation concerns and external pressures, particularly from the looming threat of US tariffs.
A Global News report noted that the Bank of Canada has already made significant moves in 2024, slashing its benchmark rate by a total of 1.75 percentage points in five consecutive cuts. As of January, the rate stood at 3.25%, at the top of the “neutral range” where borrowing costs neither stimulate nor restrict economic growth.
Inflation eases, but core pressures persist
With inflation easing to 1.8% in December, largely due to Ottawa’s GST/HST holiday, many economists believe the central bank will opt for another rate cut, though smaller than previous reductions. However, persistent inflationary pressures remain, especially in core inflation, which remains above 3%.
Adding complexity to the rate decision is the looming threat of tariffs from Donald Trump. The new US president has continued to threaten the imposition of 25% tariffs on Canadian goods, which could take effect soon after the Bank’s decision. Such a move, according to experts, could lead to a Canadian recession.
“If Trump were to carry out those 25% tariffs, and they were in place for some time, unfortunately a recession in Canada would be inevitable,” noted Stephen Brown, deputy chief North America economist at Capital Economics, in an interview with Global News.
The report noted that the impact of these potential tariffs on Canada’s economy could drive the Bank of Canada towards steeper rate cuts, but the timing and size of any such cuts are complicated. A drastic reduction in rates could further weaken the already struggling Canadian dollar, pushing up inflation by increasing the cost of imports. The Bank may be cautious not to act too aggressively in response to tariffs, experts noted.
What’s next for Canada’s monetary policy?
While many in the markets expect a rate cut at the Bank of Canada’s January 29 meeting, others, like BMO’s Benjamin Reitzes, question whether the inflation data alone justifies further cuts. The uncertainty surrounding Trump’s tariff threats, however, might prompt the Bank to act, even if the inflation numbers do not fully support it.
Economists caution that Trump’s tariffs may not even need to be implemented for the Canadian economy to feel a pinch. The mere uncertainty surrounding the potential trade war could result in a slowdown of business investment. A survey by the Bank of Canada last week showed that many firms anticipate negative impacts from Trump’s presidency.
The central bank’s policy decisions in 2025 remain uncertain. While some experts predict further rate cuts, possibly reducing the benchmark rate to 2.5%, others suggest that the pace of easing may slow, especially if the US Federal Reserve takes a less aggressive approach in its own rate decisions.
The Bank of Canada is also set to release its first monetary policy report since Trump’s re-election alongside the rate decision on Wednesday.
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