In 2024, Canada's central bank lowered its key interest rate by 1.75% through five consecutive rate cuts. (Photo: Adrian Wyld / The Canadian Press)
As Canada braces for potential economic shifts, experts urge the Bank of Canada (BoC) to pause interest rate changes and assess the evolving trade landscape. With its January 29th decision on the horizon, the BoC is under pressure to consider the impact of looming U.S. tariffs and Canada’s trade relationship with its southern neighbour.
U.S. President Donald Trump has maintained February 1st as the start date for a blanket 25% tariff on imports from Canada and Mexico. Additionally, his administration has ordered federal agencies to scrutinize trade policies, deficits, and the United States-Mexico-Canada Agreement (USMCA), which is up for review next year.
In response, Canadian officials are preparing countermeasures. Industry Minister François-Philippe Champagne called for an assertive approach, while Prime Minister Justin Trudeau voiced support for “matching” retaliatory tariffs on the U.S.
Derek Holt, Scotiabank’s vice president and head of capital markets economics, advises the BoC to hold its benchmark interest rate at 3.25%. “Taking a breather now makes sense. Cutting rates at this point may not be the right move,” Holt commented in a research note.
Similarly, David-Alexandre Brassard, CPA Canada’s chief economist, emphasized the need for careful observation of Canada-U.S. trade dynamics. He suggested that while further rate cuts might be necessary, their timing depends heavily on trade developments. “Inflation risks and the broader economy are closely tied to the evolving trade relationship,” Brassard stated in a news release.
The BoC has already eased rates by 175 basis points across five consecutive decisions in 2024. As inflation cools—dropping from 1.9% in November to 1.8% in December—the economy and labour market are showing signs of stabilization. However, demographic shifts are no longer contributing to economic growth, leaving Canada’s economy vulnerable to external pressures.
Financial markets are largely anticipating a 25-basis-point rate cut, with an 81% probability, according to Reuters. Economists from BMO and CIBC are also predicting a reduction, citing domestic economic challenges and the threat of U.S. tariffs.
While some analysts argue that recent GDP growth and inflation stability might justify a pause, the uncertainty surrounding trade policies had tipped the scales in favour of a rate cut. Thomas Ryan, a North American economist at Capital Economics, remarked, “Tariffs complicate the economic outlook, making a 25-basis-point cut the more likely scenario.”
Despite the tariff threats, Sadiq Adatia, BMO’s chief investment officer, doubts the U.S. will fully implement a 25% levy. “I don’t see 25% sticking,” he noted.
The upcoming rate decision comes at a pivotal time for Canada, with policymakers balancing domestic economic stability and the uncertainties of cross-border trade. The decision will reflect how the BoC navigates these challenges in the face of global economic pressures.
