The Canadian economy ended 2024 on a high note, growing by 2.6% in the fourth quarter—much stronger than expected by economists, including those at the Bank of Canada. As a result, it entered 2025 in a solid position, especially with inflation close to the bank’s 2% target.
All in all, it seemed like the perfect economic environment for the bank to pause its rate-cutting cycle. However, on Wednesday, the bank proceeded with another 0.25% cut—its seventh consecutive reduction—bringing the overnight rate down to 2.75%.
Tim Macklem, Governor of the Bank of Canada, said the cut was a direct response to the mounting trade war with the U.S. and ongoing uncertainty surrounding tariffs.
“While economic growth has come in stronger than expected, the pervasive uncertainty created by continuously changing U.S. tariff threats is restraining consumer spending intentions and business plans for hiring and investment,” Macklem said. “Against this background, and with inflation close to the 2% target, the Governing Council decided to reduce the policy rate by a further 25 basis points.”
Analysts and economists from Canada’s major banks have weighed in on the decision, with their reactions curated by Canadian Mortgage Trends.
Oxford Economics cited “elevated trade policy uncertainty” as the primary reason for the rate cut, adding that without this uncertainty, the bank would likely have held the rate at 3%.
Avery Shenfeld, Chief Economist at CIBC World Markets, described the rate cut as a “Band-Aid for a wound of unknown size,” adding that the bank placed greater weight on downside risks to growth, which ultimately justified the cut.
“If not for the trade threat, modest further rate cuts might still have been needed, but there would have been no urgency to deliver an easing (on Wednesday),” he said.
Looking ahead, Shenfeld said CIBC is forecasting two more 0.25% rate cuts in April and June, bringing the overnight rate to 2.25%. However, he noted that if tariffs remain in place longer than expected, “a more protracted trade war could require even deeper cuts.”
Senior Economist James Orlando at TD Economics said the Bank of Canada would have been justified in holding its rate steady on Wednesday. He suggested the bank is “buying” insurance against a slowdown without yet knowing the full impact of tariffs on businesses and consumers. Like CIBC, TD expects two more cuts by June but cautioned that the bank cannot go much lower without risking inflationary problems.
Oxford Economics agreed, stating, “We can’t entirely rule out a couple more (0.25%) rate cuts to cushion against the negative impacts of ongoing uncertainty,” but added that the bank is unlikely to lower rates below 2.25%.
Frances Donald, Chief Economist at RBC Economics, noted that the bank is dealing with an unprecedented level of uncertainty, which was underscored by the lack of forward guidance in its statement.
Donald added that while the bank maintains a dovish bias, it is facing “more than usual uncertainty” and is running multiple scenario analyses to gauge the impact of tariffs.
To that point, during his press conference on Wednesday, Macklem acknowledged, “Monetary policy cannot offset the economic consequences of a protracted trade conflict.”
Regardless of how long tariffs and the Canada-U.S. trade tensions persist, they will be the primary factor influencing Bank of Canada decisions. The challenge for policymakers is balancing the economic slowdown caused by tariffs with the inflationary pressures they create.
Douglas Porter, Chief Economist at BMO Financial Group, stated, “We strongly suspect that the weak growth impact will dominate. While the bank’s caution means it will proceed very slowly, the ultimate destination for rates is lower than the market now expects.” Porter added that BMO has updated its forecast to include three additional 0.25% rate cuts at each of the next three meetings, bringing the overnight rate to 2% by year-end.
Economists at National Bank of Canada believe that inflation concerns remain a key constraint for the Bank of Canada, even as economic uncertainty grows. They noted that the bank struck a more hawkish tone on inflation, citing rising short-term inflation expectations and businesses’ plans to pass on higher costs.
“It’s not just the inflation assessment that struck us as hawkish either,” NBC economists said. “The bank dropped all references to excess economic slack and the output gap, instead stating that Canada’s economy entered 2025 on solid footing, supported by robust GDP growth. While it’s true that the economy is in better shape than most had expected, we still believe there is excess supply.”
