Despite inflationary concerns, Canada is set for a rate cut next week
In normal times, the Bank of Canada would be cautious when it makes its interest rate decision next week, because inflation is still stubborn. But these are not normal times and the concern about economic slowdown is likely to result in an April rate cut.
The impact of tariffs, while not as widespread as it once appeared thanks to USMCA, is nonetheless real, while the psychological impact of a trade war is weakening consumer sentiment, especially with expectation that tariffs could last for Trump’s full term.
Economists are grappling with the daily swings of the markets – and of US trade policy – but many are of the opinion that the BoC will need to respond to the risks by cutting rates, despite the problem of inflation.
CPA Canada’s chief economist, David-Alexandre Brassard, is expecting a cut next week and says there could be an acceleration of the BoC’s policy.
“Inflation will play a key role in the Bank of Canada’s decision next week, determining whether February’s inflation rebound was a temporary blip or the start of a longer-term trend,” says Brassard.
“With Canada now tariffing $60 billion in US goods and automobiles, and inflation data due just a day before the rate announcement, the Bank of Canada faces a high stakes balancing act.”
Along with inflation, Brassard’s view that the central bank could speed up cuts also considers the cooling housing market, and the latest labour report showing rising unemployment.
Other economists are also expecting a rate cut next week.
“Despite the rise in short-term inflation expectations now, there is no evidence of a sharp rise in longer-term views, leaving the door open for another cut in April,” wrote TD Economics’ Maria Solovieva, CFA, in a commentary.
While RBC’s Claire Fan said that due to uncertainty “we continue to expect the Bank of Canada will move cautiously in their upcoming meetings to consider impact on both growth and inflation and the fact that fiscal policy is likely the more suitable first line of defense in response to trade-related economic weakness.” The RBC Economics team expects the BoC to cut the overnight rate by another 25 basis points in April.
