Uncertainty continues to cloud the picture for the Canadian economy
It’s a short week for the markets in North America, but as we know, a lot can happen in a short period.
Much uncertainty remains about what the US president may announce and the impact it will have on Bay Street – last week the S&P/TSX Composite Index was up 1.70%, its largest one-week percentage gain since the week ending Nov. 22, 2024, and snapping a two week losing streak.
But there are two major domestic factors to watch this week as inflation data and interest rates are revealed.
Economists polled by Reuters are expecting Tuesday’s inflation reading for March to be the same as the previous month at 2.6% with food inflation and the higher cost of imports among the drivers, although the full implementation of retaliatory tariffs by Canada has yet to emerge.
With expectation of inflation to ease in the months ahead, there is a risk in the Bank of Canada deciding to cut rates at Wednesday’s meeting, but with the potential for other economic measures to slow, it may feel there is greater risk in not cutting.
Economists are split.
“The door is certainly open for the Bank to trim the policy rate by another 25 bps as a precautionary measure, a view we are leaning toward. That said, taking a pause is still a potential option,” said TD economists Marc Ercolao. “Balancing the opposing forces of inflation and growth will keep the BoC on their toes in the coming months.”
RBC’s Nathan Janzen and Abbey Xu point to economic red flags such as weakening consumer confidence and business investment and while they note that the BoC rate decision is a close call “we expect they will ultimately opt to add another “insurance” 25 basis point cut in the face of escalating US tariff risks.”
At National Bank, the economics team are expecting a hold from the central bank, although it may not do so for long. If economic data continues to suggest softer growth “we expect the central bank to cut its policy rate three times this year, with the first move coming as early as the June meeting.”
CIBC’s Avery Shenfeld believes that the case for a rate cut remains but is not certain. But with recent data such as the labour report and an expected negative tone in the BoC’s Monetary Policy Report which will also be revealed Wednesday “we could all use a little cheer from a 25 basis point Easter present from our central bankers,” he wrote.
