Bank of Canada lowers rates but offers no clear guidance as US tariff threats and growth concerns persist
The Bank of Canada cut interest rates by 25 basis points to three percent on Wednesday, its sixth consecutive cut, but did not provide guidance on future moves, departing from its usual approach.
Financial Post reports that economists cite multiple factors contributing to this uncertainty
Avery Shenfeld, chief economist at CIBC Economics, noted that policymakers are struggling to determine the next steps.
“The Bank of Canada isn’t so sure about what comes next, but then again, who is?” Shenfeld said following the rate decision.
The Bank of Canada governor, Tiff Macklem, identified the uncertainty surrounding potential US tariffs as a key risk, calling it a “major uncertainty.”
Former US President Donald Trump has repeatedly raised the possibility of a 25 percent tariff on Canadian imports, further complicating economic forecasts.
Economists also highlight the difficulty in determining the neutral rate, where borrowing costs neither stimulate nor slow economic activity.
Shenfeld noted that “the (Bank of Canada) faces some uncertainties over where the neutral rate lies and, therefore, how low rates need to be to achieve their projected pickup in economic activity.”
The Bank of Canada’s latest Monetary Policy Report forecasts GDP growth of 1.8 percent in both 2025 and 2026, up from 1.3 percent in 2024.
Shenfeld believes the current three percent rate is still restrictive and expects the central bank to cut rates by another 75 basis points, bringing the benchmark lending rate down to 2.25 percent.
A weaker labour market and low inflation support further cuts, Shenfeld said, adding that if a trade war with the US escalates, the need for more aggressive rate cuts would depend on fiscal policy responses.
Other economists share the view that interest rates are likely to decline further.
Charles St-Arnaud, chief economist at Alberta Central, expects another rate cut at the Bank of Canada’s March meeting. He pointed to slowing population growth, which could lower the neutral rate and make the current policy rate increasingly restrictive.
David Rosenberg, founder of Rosenberg Research & Associates Inc., questioned the Bank of Canada’s neutral rate range, arguing that the economy is not in equilibrium but in a state of “excess supply.” He suggested that interest rates should already be as low as 1.5 to two percent.
“The market is telling you that the (Bank of Canada) will do little more than bring the policy rate down to the midpoint of its own estimate of the neutral range,” said Rosenberg.
He argued that this approach “makes no sense” since the central bank acknowledges the economy remains unbalanced and stuck in a deflationary state of excess supply.
If US tariffs are imposed, Rosenberg believes the Bank of Canada could be forced to cut rates further, possibly to zero.
Macklem acknowledged that while inflation has remained near the two percent target since August and household spending is improving, a trade conflict with the US could significantly impact economic growth and inflation.
