Weak hiring, falling confidence, and trade war could trigger another rate drop despite inflation concerns
The Bank of Canada is once again facing a pivotal decision as it prepares to announce its next interest rate move on Wednesday. After a series of aggressive cuts since last June, the central bank is expected to deliver another 25-basis-point reduction, though the call is far from certain.
According to analysts, the decision is being shaped by mounting global risks, particularly ongoing trade tensions with the United States. While markets are leaning slightly toward a pause after seven consecutive cuts, RBC Economics forecasts the central bank will opt for what it calls an “insurance” rate cut, citing rising financial uncertainty and recession concerns.
“Minutes from the last BoC meeting largely confirmed that the central bank would have foregone a cut to the overnight rate in March if not for heightened trade risks,” RBC assistant chief economist Nathan Janzen noted in a commentary.
“We continue to think that fiscal policy is better positioned to provide the kind of timely, targeted, and temporary support needed for the economy as needed than changes in interest rates.”
Since June, the Bank of Canada has lowered its policy rate by a total of 2.25 percentage points, more than any other central bank among the Group of Seven nations.
Prime Minister Mark Carney added to concerns last week, pointing to the impact of US trade war on Canadian markets and jobs.
"There are initial signs of slowing in the global economy," Carney told reporters, following a meeting of the US-Canada cabinet committee.
He cited March’s employment figures, which revealed the largest job loss in three years, as evidence of a “marked tightening” in financial conditions.
Meanwhile, US markets have remained volatile. Yields on Treasurys rose last week as investors moved away from American assets. President Trump attempted to ease tensions by announcing a 90-day pause on reciprocal tariffs, but uncertainty continues to weigh on Canadian policy decisions.
At home, Canadian businesses are showing signs of concern. According to the Bank of Canada’s first-quarter Business Outlook Survey, hiring plans have dipped below levels seen during the pandemic. About 32% of firms surveyed now expect a recession within the next year, more than double the 15% recorded in the previous quarter.
Housing markets have also softened, tempering the risk that lower interest rates could reignite home price surges. Still, housing starts are expected to climb to 288,000 units in March, up from 229,000 in February, as homebuilders recover from earlier weather-related disruptions. Strong building permit activity suggests continued construction momentum.
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On the consumer side, RBC’s data tracking indicates spending has remained relatively stable despite sharp drops in consumer confidence in March. However, signs of weakening are evident in other sectors. Business investment and manufacturing activity have both slowed, with manufacturing sales expected to have dipped 0.2% in February, following a 1.7% gain in January. Declines were most notable in the food, petroleum, and coal subsectors.
Wholesale sales are expected to rise modestly, 0.4% in February, mainly due to increased activity in the machinery, equipment, and supplies segment.
Complicating the Bank of Canada’s decision is the inflation picture. Despite economic headwinds, inflation has held steady. March’s headline CPI is expected to come in at 2.6% year-over-year, matching February’s reading. Lower gasoline prices are likely to be offset by the end of the federal GST/HST holiday and higher restaurant costs, contributing to sustained inflationary pressure.
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