Economists expect sixth straight – but modest – rate cut from Bank of Canada

TORONTO — Economic forecasts suggest the Bank of Canada will likely lower its key policy rate by a quarter of a percentage point on Wednesday in light of recent inflation and jobs data, bringing it down to three per cent.

The quarter-point cut would mark a slowdown from the central bank’s two previous supersized cuts. It slashed its key rate by half a percentage point in October and December as inflation hovered at or below its two per cent target.

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Canada’s annual inflation rate fell to 1.8 per cent in December, largely on the back of the federal government’s temporary GST tax break.

“(With) inflation data, we saw all the numbers coming down, so that is a positive sign,” said Tu Nguyen, an economist at RSM Canada.

“We don’t really expect inflation to go back up, and they are squarely in the two per cent target right now, so it seems like the bank has enough room to have another cut.”

Statistics Canada said last week that restaurant food purchases and alcohol bought from stores contributed the most to the deceleration in the overall inflation reading. Ottawa introduced a temporary pause on taxes to those items in mid-December, along with other items including children’s clothing and some toys.

Without the tax break, the agency said the annual inflation rate would have risen to 2.3 per cent.

While higher than expected core inflation and recent GDP growth could justify a rate pause, the tariff threat from the U.S. should prompt a modest cut, said a report by Capital Economics’ Thomas Ryan.

U.S. President Donald Trump signalled last week that his threat of a universal 25 per cent tariff on Canadian goods could become reality as soon as Feb. 1.

Ryan said markets were pricing in a small chance of a hold, with the majority forecasting a quarter-point cut.

“The elephant in the room is the newly elected president south of the border, who has threatened again and again to slap a 25 per cent tariff on all Canadian imports,” said the economist, noting such a move would cause GDP to fall around three per cent and trigger a recession.

“Even if he does not follow through, such threats are likely to weigh heavily on business confidence this year. The bank will be keenly attuned to those risks at next week’s meeting and may feel some sense of urgency to act.”

Overall, the Bank of Canada has lowered its key interest rate five consecutive times since last June.

But governor Tiff Macklem said last month the bank would likely slow down the pace of cuts going forward.

The possibility of a trade war with the U.S. makes it unlikely the bank will extend its streak of cuts to seven when it makes its subsequent decision in March, said Nguyen.

“I think now more than ever it’s wise for the bank to slow the pace and really make a decision one meeting at a time,” she said.

“It goes back to the amount of uncertainty that the Canadian economy is facing. 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 the latest jobs data from Statistics Canada also point to the likelihood of a modest cut this go-round.

Canada’s labour market added 91,000 jobs in December as the unemployment rate dipped 0.1 percentage points to 6.7 per cent, according to the latest labour force survey.

The report also highlighted decelerating wage growth, with average hourly wages rising 3.8 per cent year-over-year in December — the slowest growth since May 2022.

Nguyen said wage growth in Canada had been driving service inflation, meaning the latest drop points to an easing of price growth.

NerdWallet Canada financial expert Shannon Terrell agreed a “more measured” cut of a quarter per cent is the likeliest outcome of Wednesday’s announcement, but didn’t rule out a rate hold.

“December’s employment numbers suggest the country’s economic engine may be finding its footing without the need for stimulus,” she said in a press release.

“Plus, with inflation finally wrangled near the bank’s target, steady rates may help us hold the line and preserve the stability we’ve fought hard to achieve.”

This report by The Canadian Press was first published Jan. 27, 2025.

Sammy Hudes, The Canadian Press