Tariff uncertainty hangs over Bank of Canada’s 1st rate decision of 2025 – National

The Bank of Canada is facing conflicting pressures as it approaches its first interest rate decision of the year on Wednesday.

Concerns about underlying inflation and the looming threat of a trade war with the United States are pulling the central bank in different directions.

President Donald Trump’s potential tariffs of 25 per cent on Canadian goods could lead to a recession in Canada, according to Stephen Brown, deputy chief North America economist at Capital Economics.

While a trade blow like this would typically prompt steeper rate cuts to stimulate economic growth, dropping rates too quickly could worsen inflation due to the weakened Canadian dollar.

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Given these challenges, economists anticipate that the Bank of Canada will proceed with a rate cut on Wednesday, though it may be smaller than previous cuts.

The Bank of Canada’s benchmark interest rate influences borrowing costs and mortgage rates in Canada, and it has been reduced by a total of 1.75 percentage points over five consecutive decisions.

Despite signs of economic weakness and concerns about inflation levels, the policy rate currently stands at 3.25 per cent, at the upper end of the neutral range.

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Market expectations indicate a high likelihood of a quarter-point rate cut on January 29, with speculation about a more gradual approach to future rate reductions.

While inflation remains under control, concerns about a potential trade war and the impact of Trump’s tariffs complicate the central bank’s decision-making process.

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Further interest rate cuts could exacerbate the weakness of the Canadian dollar and potentially increase inflation, especially as the U.S. Federal Reserve considers pausing its own rate cuts.

Benjamin Reitzes, from BMO, suggests that the current inflation data may not justify another rate cut at the upcoming meeting.

The looming threat of tariffs could impact Canada’s economy even if they are not implemented, as businesses may reduce investments due to the uncertainty surrounding Trump’s trade policies.

The extent of the economic damage caused by Trump’s threats will depend on the implementation, scale, and duration of the tariffs.

In light of these factors, Reitzes believes that a 25 basis point rate cut is still likely, despite inflation concerns.

While the Bank of Canada may prioritize economic stability over inflation worries in the event of tariff implementation, the decision remains complex.

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The future direction of the Bank of Canada’s interest rates in 2025 remains uncertain, with expectations of further rate cuts to reach 2.5 per cent by year-end.

While the Bank of Canada may adjust its rates based on various factors, including the outcome of Trump’s trade policies and the actions of the U.S. Federal Reserve, the central bank’s decision-making process is complex and multifaceted.

The Bank of Canada will also provide an updated monetary policy report alongside its rate decision on Wednesday, offering insights into the economic landscape following Trump’s re-election.

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