The Bank of Canada is set to announce its decision on interest rates on Wednesday, March 12, 2025, with widespread expectations for a 25 basis point cut bringing the policy rate down to 2.75%. This anticipated reduction marks the seventh consecutive cut since June 2024, as the central bank navigates the economic turbulence spurred by U.S. trade policies.
Currently, the policy rate sits at 3%, which is close to the upper limit of the Bank’s neutral range of 2.25% to 3.25%. Jeremy Kronick, vice-president of economic analysis and strategy at the C.D. Howe Institute, noted, "There’s no harm in getting back to the mid-point of the range." He emphasized the need for continual support as the Canadian economy contends with uncertainties linked to potential tariff shocks.
Recent data offers mixed signals about the Canadian economy. The economy finished 2024 on a high note, growing at an annualized pace of 2.6% during the fourth quarter. Yet, the labor market showed signs of stress, with only 1,100 jobs added in February 2025, and the unemployment rate remaining steady at 6.6%. Following this sluggish employment report, market speculation surrounding the likelihood of a rate cut surged, with expectations exceeding 80%.
The primary concern influencing the Bank of Canada’s decision stems from U.S. President Donald Trump’s announcement of impending tariffs. Last Thursday, Trump delayed the imposition of blanket tariffs on Canadian goods, which encompass 25% on all products compliant with the Canada-United States-Mexico Agreement (CUSMA), until April 2, 2025. Nonetheless, the immediate imposition of 25% tariffs on Canadian steel and aluminum exports is still set for the same day as the Bank of Canada’s announcement.
Leading economists from Canada’s major banks are carefully weighing these developments. Economists at National Bank remarked, "Unlike prior decisions, easing will be less about absorbing already-accumulated economic slack and more about supporting an economy mired in trade conflict." They stress the importance of proactive monetary measures to soften potential economic repercussions.
Trade analysts anticipate stark consequences should U.S. tariffs be fully enforced. The Bank of Canada has warned of possible outcomes indicating up to 12% cuts to Canadian investment and 8.5% reductions in exports if trade conflicts escalate. More broadly, economists predict trade disputes could shave 3% off of Canada’s gross domestic product over two years.
Avery Shenfeld, CIBC's economist, commented on the precarious environment, stating, "The trade war is still very much in play," adding concern over the impacts of stockpiling by U.S. importers as they rush to shift shipments prior to the tariffs coming online.
Several economists foresee the rate cut as more of precautionary insurance against these potential escalations rather than evidence of underlying economic weakness. TD's Marc Ercolao noted, "This will give Canada’s first-quarter GDP a boost... but any economic strength is expected to be short-lived as the trade war deepens." Ercolao and his colleagues expect the Bank to opt for the quarter-point cut, which they believe will provide necessary support amid worsening trade dynamics.
Scotiabank's Derek Holt described market expectations as leaning toward another quarter-point cut, distinctively addressing the notion of maintaining stability as "the tariff effect isn’t necessarily clear-cut for the cut or easing bias." He also added, "Inflation expectations continue to be well above the BoC’s 2% target," which complicates how to interpret economic signals.
Echoing the sentiment of many, RBC's economists Nathan Janzen and Claire Fan described the impending interest rate decision as likely being "a very close call" but acknowledged the extensive uncertainty stemming from fluctuative U.S. trade policies. They argue, "If not for trade risks, the BoC would have ample reason to hold the policy rate steady at 3%."
BMO's chief economist Douglas Porter forecast quarter-point cuts at each of the Bank's subsequent meetings, projecting the rate could tumble to as low as 2%. Porter cautioned, "The net risk is to eventually go even lower..." and emphasized the need for caution amid the uncertainty of U.S. tariffs weighing heavily on both economies.
With all eyes on the upcoming announcement, the financial community is held captive by the United States’ next steps. Tiff Macklem, the Bank of Canada governor, acknowledges the multifaceted nature of tariffs, stating, "What the tariffs mean for the global economy, and for the Canada-U.S. trade relationship, is highly uncertain. Even when we know more, it will be hard to predict the economic impacts because we haven’t experienced such broad-based tariffs since the 1930s."
With tomorrow's meeting promising to be pivotal, stakeholders range to understand the depth of the Bank's solutions amid external pressures, with the reality setting the stage for continuous adjustments going forward.