Trade risks and slowing wage growth drive expectations for a quarter-point rate cut this week
The Bank of Canada is expected to lower its key policy rate by a quarter of a percentage point on Wednesday, bringing it down to 3 percent.
According to BNN Bloomberg, this forecast reflects recent inflation and employment data, marking a slowdown from the central bank’s earlier half-point rate cuts in October and December.
Canada’s annual inflation rate dropped to 1.8 percent in December, driven by a temporary GST tax break introduced by the federal government.
“(With) inflation data, we saw all the numbers coming down, so that is a positive sign,” said Tu Nguyen, an economist at RSM Canada.
Nguyen added that with inflation near the Bank of Canada’s 2 percent target, there appears to be room for another rate cut.
Statistics Canada reported that restaurant food purchases and alcohol from stores contributed significantly to the deceleration in inflation.
The temporary tax pause on these items, as well as on children’s clothing and toys, helped reduce inflation. Without the tax break, the agency noted, the annual inflation rate would have been 2.3 percent.
Despite lower inflation, the potential for a US tariff on Canadian goods adds pressure. US President Donald Trump recently reiterated his threat of a 25 percent tariff on Canadian imports, possibly taking effect on February 1.
Economist Thomas Ryan of Capital Economics highlighted the risks, stating that a trade war could reduce Canada’s GDP by 3 percent and trigger a recession.
“The elephant in the room is the newly elected president south of the border,” said Ryan, noting that the threat could undermine business confidence. Ryan’s report suggested a modest rate cut may help mitigate such risks.
The Bank of Canada has already lowered its key rate five times since June. However, Governor Tiff Macklem has signalled a likely slowdown in the pace of cuts moving forward.
Nguyen noted that while uncertainty around US tariffs remains, it is prudent for the bank to proceed cautiously. “Tariffs risk hiking up inflation again, and until there’s more information on that, I think it’s safer to just slow down the pace of cuts,” she said.
Employment data also supports the case for a smaller cut. Statistics Canada’s December labour force survey reported 91,000 jobs added, with the unemployment rate dipping to 6.7 percent.
Wage growth, a key driver of service inflation, decelerated to 3.8 percent year-over-year in December, the slowest pace since May 2022.
Nguyen indicated this trend points to easing price growth.
Financial expert Shannon Terrell of NerdWallet Canada agreed that a quarter-point cut is the most likely outcome but acknowledged the possibility of a rate hold.
“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.
She added that maintaining steady rates could help preserve stability in the face of current challenges.
