Inflation data and jobs growth prompt a likely 0.25% rate cut as US tariff threats add pressure
Economic forecasts suggest the Bank of Canada will lower its key policy rate by 0.25 percent on Wednesday to 3 percent, according to BNN Bloomberg.
This decision follows recent inflation and employment data and would mark a shift from the central bank’s larger rate reductions in October and December, when rates were cut by 0.5 percent each time as inflation remained near or below the two percent target.
Canada’s annual inflation rate fell to 1.8 percent in December, largely due to the federal government’s temporary GST tax break.
Statistics Canada stated that purchases of restaurant food and alcohol from stores contributed significantly to this deceleration. Other items, such as children’s clothing and some toys, were also included in the tax pause introduced in mid-December.
Without the tax break, Statistics Canada reported that the annual inflation rate would have reached 2.3 percent.
Tu Nguyen, an economist at RSM Canada, highlighted the positive impact of the inflation data. “(With) inflation data, we saw all the numbers coming down, so that is a positive sign,” Nguyen said.
She added, “We don’t really expect inflation to go back up, and they are squarely in the two percent target right now, so it seems like the bank has enough room to have another cut.”
Canada’s labour market also showed signs of improvement in December, according to the latest labour force survey by Statistics Canada. The report revealed a gain of 91,000 jobs, which brought the unemployment rate down by 0.1 percentage points to 6.7 percent.
Despite this, wage growth slowed, with average hourly wages rising 3.8 percent year-over-year—the slowest growth since May 2022. Nguyen noted that wage growth had been a driver of service inflation, and its deceleration points to easing price growth.
Thomas Ryan, an economist at Capital Economics, suggested that external risks, such as a potential trade conflict with the United States, might influence the Bank of Canada’s decision.
Ryan commented that while higher-than-expected core inflation and recent GDP growth could justify holding rates steady, the threat of US tariffs supports a modest cut.
US President Donald Trump recently signalled the possibility of imposing a 25 percent tariff on Canadian goods as early as February 1.
Ryan warned that such a measure could reduce Canada’s GDP by approximately 3 percent and potentially trigger a recession.
“The elephant in the room is the newly elected president south of the border, who has threatened again and again to slap a 25 percent tariff on all Canadian imports,” Ryan said.
“Even if he does not follow through, such threats are likely to weigh heavily on business confidence this year. The bank will be keenly attuned to those risks at next week’s meeting and may feel some sense of urgency to act.”
Since last June, the Bank of Canada has cut its key rate five times.
However, Governor Tiff Macklem recently suggested the central bank is likely to slow the pace of rate reductions.
Nguyen reinforced this, stating, “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.” She explained that tariff risks could push inflation higher and noted the importance of evaluating the economic situation carefully.
NerdWallet Canada financial expert Shannon Terrell supported the likelihood of a small rate cut.
“December’s employment numbers suggest the country’s economic engine may be finding its footing without the need for stimulus,” Terrell stated in a press release.
“Plus, with inflation finally wrangled near the bank’s target, steady rates may help us hold the line and preserve the stability we’ve fought hard to achieve.”
