Bank of Canada Expected to Cut Rates Amid Tariff Concerns By Investing.com

Capital Economics forecasts the Bank of Canada may opt to cut its policy rate by 25 basis points at its upcoming meeting, although recent economic data may put rate cuts on hold. The decision will have an impact on the ongoing tariff threat, which poses a risk to the economic outlook.

In December, the Bank of Canada proposed to cut its policy rate by 50 basis points, a move that was debated over a smaller 25 basis point cut. The decision is aimed at the upper end of the bank’s neutral range estimate of between 2.25% and 3.25%. This is done so that the size is not considered restrictive.

Following the rate cut in December, the bank’s communications took a less somber tone, indicating a shift to a more cautious approach. The statement that the bank expected to cut policy rates further was replaced by a message that it would assess further rate cuts on a case-by-case basis. During the post-meeting press conference, Governor Tiff McLeam emphasized the gradual process of policy easing.

Recent economic indicators have shown signs of growth, with monthly GDP data for October and preliminary estimates for November showing fourth-quarter growth of 2 percent, in line with the bank’s October forecast. Business and consumer surveys conducted by the Bank of Canada also indicated that this positive trend is likely to continue.

Despite the positive economic signs, the market is currently 83% on the probability of a 25 basis point cut at the next meeting, with only a 17% chance that rates will remain unchanged. This shows that concerns related to tariffs and economic headwinds are putting a lot of pressure on the bank’s decision-making process.

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