The Bank of Canada is expected to announce a reduction in its key policy rate by a quarter of a percentage point on Wednesday, signaling a potential slowdown in its recent trend of aggressive monetary easing. This anticipated move would bring the current interest rate from 3.25% down to 3%. The central bank has already executed five consecutive rate cuts since last June, reflecting its proactive stance against economic challenges. The previous two rate reductions, in October and December, were supersized cuts of half a percentage point each, primarily aimed at addressing inflation concerns.
Canada's annual inflation rate dropped to 1.8% in December, attributed largely to the federal government's temporary GST tax break. This measure contributed significantly to the deceleration in inflation, with restaurant food purchases and alcohol sales being major factors in the decrease. Furthermore, average hourly wages saw a 3.8% year-over-year rise in December, marking the slowest growth since May 2022. The labor market also showed positive signs, adding 91,000 jobs in the same month, with the unemployment rate dipping slightly to 6.7%.
The Bank of Canada will closely monitor potential risks at its upcoming meeting, particularly the looming threat of a trade war with the United States. The newly elected U.S. president has repeatedly threatened to impose a universal 25% tariff on Canadian imports, which could severely impact Canada's economic landscape.
“The elephant in the room is the newly elected president south of the border, who has threatened again and again to slap a 25 per cent tariff on all Canadian imports,” said an economist.
“Even if he does not follow through, such threats are likely to weigh heavily on business confidence this year. The bank will be keenly attuned to those risks at next week’s meeting and may feel some sense of urgency to act,” the economist added.
Markets are currently pricing in a small chance of maintaining the rate, though most forecasts favor a quarter-point cut. This adjustment would mark a more modest approach compared to previous aggressive cuts. The Bank of Canada's governor, Tiff Macklem, indicated last month that the institution would likely decelerate the pace of rate cuts going forward.
“December’s employment numbers suggest the country’s economic engine may be finding its footing without the need for stimulus,” observed Shannon Terrell.
“Plus, with inflation finally wrangled near the bank’s target, steady rates may help us hold the line and preserve the stability we’ve fought hard to achieve,” Terrell continued.
Terrell further emphasized caution amid prevailing uncertainties:
“I think now more than ever it’s wise for the bank to slow the pace and really make a decision one meeting at a time.”
“It goes back to the amount of uncertainty that the Canadian economy is facing. Tariffs risk hiking up inflation again, and until there’s more information on that, I think it’s safer to just slow down the pace of cuts.”
These sentiments resonate with other economic analysts who believe that while core inflation and recent GDP growth could justify a pause in rate cuts, external threats like U.S. tariffs necessitate a more conservative approach.
“While higher than expected core inflation and recent GDP growth could justify a rate pause, the tariff threat from the U.S. should prompt a modest cut,” stated Thomas Ryan.
