The central bank is still expected to bring rates lower despite emphasis on keeping inflation under control
The Bank of Canada’s third decision of the year on interest rates arrives today (April 16) at a time of potentially grave peril for the national economy, with US president Donald Trump’s global tariff war threatening thousands of Canadian jobs and raising fears of a sharp downturn in 2025.
But a flurry of central bank rate cuts before the end of the year is by no means a surefire thing despite that possible economic danger – especially if inflation starts to tick upwards again thanks to Trump’s tariffs, which include steep levies on Canadian steel and aluminum.
Economists and markets remained split in the buildup to Wednesday’s decision on whether the Bank would make its eighth rate cut in a row, with Royal Bank of Canada (RBC) economists Nathan Janzen and Abbey Xu highlighting the “close call” facing central bank decisionmakers.
Carl Gomez (pictured top), chief economist and head of market analytics for Costar Group, also told Canadian Mortgage Professional neither a rate cut nor hold would be a surprise, although the days of oversized rate reductions are firmly in the past.
“I think the Bank of Canada maybe has a 50-50 chance of cutting again [on April 16],” he said. “If they cut, it’s not going to be a 50-basis-point cut. I think those [oversized] cuts were really in recognition that they were behind the curve. They’d lifted interest rates too sharp, too high, to an underlying economy that was still relatively weak. They needed to get back to neutral.
“They’re already back at neutral, which means it either stimulates or takes away from demand. Whether they want to go to a more accommodative policy really comes down to balancing the risk between the economy and inflation.”
Pressure on Canadian dollar eases – but remains elevated
The Bank’s policy rate has fallen from a two-decade high of 5% in April last year to its current level of 2.75%, although in its last decision it highlighted the importance of keeping inflation in check amid Trump’s tariffs.
Amid the housing crisis, Charles St-Arnaud argues Canada's affordability issue goes beyond policy fixes like mortgage rule changes. https://t.co/idHzQkDBXB
— Canadian Mortgage Professional Magazine (@CMPmagazine) April 10, 2025
“Short-term inflation expectations have risen in light of fears about the impact of tariffs on prices,” the Bank said in March. “Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation.”
The Canadian dollar has also plunged against the greenback since the onset of the trade war – although it posted a recovery last week – and that fall will also be top of mind for the central bank as it weighs up its path ahead, according to Gomez.
“The weak Canadian dollar is a bit of a cushion to exporters but can contribute to inflation itself, imported inflation. They’re not going to be willing to cut all that much more sharply,” he said.
“I think there’s a 50-50 chance that they do 25 basis points [in April] – but thereafter, I don’t think they’re going to be willing to take the policy rate anywhere lower than 2%.”
Latest inflation reading could boost chances of an April cut
Prospects of a central bank rate cut in April received a shot in the arm with cooler-than-expected inflation data for March, released yesterday.
Statistics Canada said inflation slowed to an annual pace of 2.3% last month despite economists’ expectations that it would remain unchanged, boosting money market odds of an impending rate reduction by the central bank.
But the unpredictability and chaos that’s characterized US-Canada relations since the turn of the year will also loom large in the central bank’s thinking, Gomez said, and potentially weigh against the Canadian housing market’s growth in the months and years ahead.
“I think the world that we knew for the last 20-30 years of globalization – low interest rates, stability – that’s changing,” he said. “And looking back to the last 10-15 years, the housing market… going up simply because of low interest rates is probably unlikely in this kind of environment. Even if the president pulls back on the tariffs, we’re still going to have a destabilized trading world.”
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