Economists predict the Bank of Canada will lower its key policy rate by 0.25 percentage points on Wednesday, reducing it to 3%, as inflation remains subdued and recent employment data show promising signs of economic stability.
This anticipated rate cut marks the sixth consecutive reduction since last June, although it signals a shift to a more cautious pace compared to the half-percentage-point cuts in October and December.
Canada’s annual inflation rate dipped to 1.8% in December, aided by the federal government’s temporary GST tax break on items like restaurant food, alcohol, children’s clothing, and some toys. Without the tax break, inflation would have stood at 2.3%, slightly above the central bank’s 2% target.
Economist Tu Nguyen of RSM Canada highlighted that falling inflation data has given the Bank of Canada room for another modest rate cut. “Inflation is squarely in the two percent target, so it seems like the bank has enough room to have another cut,” she said.
Despite the favorable inflation outlook, looming external risks are influencing the central bank’s decision. U.S. President Donald Trump’s threat of a 25% tariff on Canadian goods—potentially taking effect on February 1—has heightened uncertainty.
Economist Thomas Ryan of Capital Economics warned that such a tariff could cause Canada’s GDP to drop by 3% and trigger a recession, adding pressure on the Bank of Canada to act preemptively. “Even if Trump does not follow through, such threats are likely to weigh heavily on business confidence,” Ryan said.
Recent jobs data also support the case for a modest rate cut. Canada added 91,000 jobs in December, pushing the unemployment rate down to 6.7%. However, wage growth has decelerated, with hourly wages rising 3.8% year-over-year—the slowest growth since May 2022.
Nguyen noted that slower wage growth, which has been a driver of service inflation, suggests easing price pressures.
Financial expert Shannon Terrell of NerdWallet Canada argued that while a quarter-point cut seems likely, a rate hold cannot be ruled out. “December’s employment numbers suggest the country’s economic engine may be finding its footing without the need for stimulus,” she said.
Bank of Canada Governor Tiff Macklem has previously signaled that future rate cuts would be more measured, reflecting the complex mix of domestic and external uncertainties.
With inflation under control but trade threats looming, the Bank of Canada faces a delicate balancing act in its efforts to support the economy while preserving stability. Many analysts expect the pace of rate cuts to slow further, with a potential pause in March as the central bank evaluates the evolving economic landscape.