Leading economist expect a further 25 point cut next week
The latest print of the Canadian Consumer Price Index has strengthen the case for more interest rate cuts next week and for the rest of 2025.
The 1.8% increase in the CPI in December following a 1.9% increase in November (year-over-year basis) was impacted by the temporary GST/HST pause on certain goods including food purchased from restaurants for which the CPI declined 1.6% year-over-year. When food is excluded from the CPI, Statistics Canada says the index was up 2.1%.
With this in mind, and the uncertainty for inflation and the economy (especially with US tariffs set for February 1), leading economists are expecting the Bank of Canada to make a further interest rate cut next week and to continue with cuts during the remainder of the year.
But the jumbo rate cuts made at the end of last year are unlikely to be seen again anytime soon as the central bank balances inflationary concerns with the need to keep the economy growing. However, expectation of smaller cuts has been wrong before.
At CIBC Economics, Andrew Grantham said that inflation data will be harder to dissect when the January figures are known, as this will include a full month of the sales tax holidays, but he expects a 25 basis point cut from the BoC next week.
National Bank of Canada’s Matthieu Arseneau and Ethan Currie also believe a 25-point cut is incoming and, if Canada does manage to avoid President Trump’s 25% tariffs, lower rates could fuel above-potential growth for the economy.
TD Economics’ Leslie Preston agrees that 25bps is likely next month, to push rates further into neutral territory and provide something of a buffer for demand softness in the economy. Preston also says that the 25-point cuts will be the BoC’s decision at every other rate announcement this year.
Michael Davenport at Oxford Economics Canada said that inflationary pressures appear benign but noted that there will likely be inflation volatility ahead. He expects a 25bps cut on January 29.
Scotiabank’s Derek Holt continues to sail against the tide. Although he notes that the market pricing shows expectation of a rate cut next week at 80%, he believes that the BoC should pause cuts for now but would keep options open for future decisions, given that the 175bps of cuts so far puts the BoC at or close to a neutral rate when compared to the Fed. Holt says there is no rush to cut again.
