As Canada grapples with economic uncertainty, BofA Securities has forecasted that the Bank of Canada (BdC) will lower its key interest rate by 25 basis points to 2.50% on April 16, 2025. This anticipated reduction comes amid significant slowdowns in both economic activity and the labor market, compounded by the effects of recent tariffs.
Carlos Capistran, an economist at BofA, noted that the Canadian economy has been adversely affected by ongoing trade conflicts with the United States. Recent data paints a concerning picture: February's Gross Domestic Product (GDP) showed no growth, and retail sales dipped by 0.4%. Furthermore, consumer and business sentiment has taken a hit during the first quarter, reflecting growing apprehension about economic stability.
In March, the labor market experienced a notable slowdown, with a loss of 32,600 jobs, which pushed the unemployment rate up to 6.7%. Both the manufacturing and service sectors have been impacted, indicating a broader economic downturn. Capistran emphasized that confidence in job security, particularly in trade-exposed industries, has weakened significantly.
Adding to the complexity of the situation is inflation. In February, both headline and core inflation rates increased, with the headline rate rising to 2.6% year-over-year from 1.9% in January. Core inflation measures are hovering near 3.0%, just below the upper limit of the BdC's target range. There is growing concern that the tariffs could lead to higher prices, although the impact is expected to be temporary.
BofA Securities describes the upcoming decision from the BdC as a challenging one, with risks leaning towards maintaining the current rates due to rising inflation and inflation expectations. However, the firm argues that a rate cut is warranted given the economic slowdown and deteriorating labor market conditions.
The BdC's forthcoming policy response will hinge on how tariffs influence inflation and whether these pressures remain manageable. Meanwhile, Macquarie has echoed BofA's predictions, also anticipating a 25 basis point reduction in the key interest rate during the BdC's monetary policy meeting.
As the situation unfolds, economists and analysts will be closely monitoring developments, with many hoping that the BdC's actions will help stabilize the economy and restore confidence among consumers and businesses alike. With significant challenges ahead, the focus will be on how effectively the BdC can navigate these turbulent waters.
