The Bank of Canada is poised to make pivotal decisions about its key interest rate as economic indicators suggest the likelihood of a reduction. Anticipated to fall by 25 basis points to 3.0% on January 31, 2025, this decision is primarily influenced by recent inflation trends and economic uncertainties surrounding trade relations with the United States.
Current data highlights Canada’s annual inflation rate has dipped to 1.8%, thanks largely to the federal government’s temporary GST tax break. This reduction, enacted to alleviate living costs, has played a significant role in maintaining inflation at manageable levels, with core measures remaining elevated over the past few months. Economists interpret this data as presenting the Bank of Canada with some room to reduce interest rates. "With inflation data, we saw all the numbers coming down, so that's a positive sign," said Tu Nguyen, economist at RSM Canada.
The central bank's interest rate stands at 3.25%, the upper limit of its neutral range. Following previous substantial cuts—a half-percentage point reduction each occurring in October and December—the bank is now expected to adopt a more measured approach, as suggested by Governor Tiff Macklem’s recent statements advocating for caution.
At the heart of the upcoming decision lies the uncertainty created by U.S. President Donald Trump's potential threats of imposing tariffs on Canadian goods—an issue which has economic forecasters diligently evaluating the situation. Derek Burleton, deputy chief economist at Toronto-Dominion Bank, remarked, “Inflation's remaining a little bit more persistent than expected, spending has been picking up, but I think the ‘Trump card’ is going to be the downside risk.”
The looming threat of tariffs has left many economists concerned about the repercussions on the Canadian economy. If the tariffs are enforced, they could lead to severe impacts on Canada’s GDP, with some projecting declines around 3% based on past evaluations. Thomas Ryan, economist at Capital Economics, cautioned, “Even if he does not follow through, such threats are likely to weigh heavily on business confidence this year.” Such sentiments echo the warnings issued by various analysts about the volatility of trade relationships affecting economic stability.
Other analysts also suggest the bank’s next steps will be closely tied to developments from the U.S. and caution against hastening decisions. Jimmy Jean, chief economist at Desjardins Group, expressed, “We expect a 25-basis-point rate cut, and that's where the market is positioned as well.” Yet, he acknowledged, the unpredictability of trade relations requires the bank to maintain flexibility. “What we might see is at bare minimum, the language and the forward guidance likely to lean dovish,” he added.
Recent employment data supports the notion for easing interest rates. Statistics Canada revealed the country added 91,000 jobs, contributing to lowering the unemployment rate to 6.7%. These conditions suggest the economy is adjusting positively but remains susceptible to external pressures such as tariffs. Nguyen emphasized the importance of this shift, asserting, “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.”
Concurrently, Shannon Terrell, financial expert at NerdWallet Canada, provided perspective on the importance of measured responses, stating, “December’s employment numbers suggest the country’s economic engine may be finding its footing without the need for stimulus.” She suggested the bank’s decision to keep rates steady could preserve the economic stability Canadians have worked hard to achieve.
Overall, the upcoming decision by the Bank of Canada is surrounded by uncertainty, with various economic indicators offering mixed signals. The trade risks posed by potential U.S. tariffs create challenges for policymakers, compelling them to navigate carefully between sustaining economic growth and fighting inflation. With many economists forecasting additional cuts could occur through 2025 depending on how the trade dynamics evolve, the upcoming rate announcement promises to be pivotal for Canada’s economic outlook.