Capital Economics predicts that the Bank of Canada would likely opt for a 25 basis point cut in its key rate at the next meeting, despite recent economic data that could warrant a pause in rate cuts. The decision is influenced by the ongoing threat of tariffs, which poses a risk to the economic outlook.
In December, the Bank of Canada made a narrow decision to cut its key rate by 50 basis points, a decision that was debated against a more modest cut of 25 basis points. The move was aimed at reaching the upper end of the Bank’s neutral range for the policy rate, which is between 2.25% and 3.25%. This was done to ensure that the rate was not considered restrictive.
After the rate cut in December, the Bank’s communication adopted a less accommodating tone, indicating a move towards a more cautious approach. The statement that the Bank planned to further cut the policy rate was replaced with a message to assess the need for further rate cuts on a case-by-case basis. During the press conference following the meeting, Governor Tiff Macklem emphasized a phased approach to policy easing.
Recent economic indicators have shown signs of growth, with monthly GDP data for October and the preliminary estimate for November suggesting a 2% growth rate for the fourth quarter, in line with the Bank’s October forecast. Business and consumer surveys conducted by the Bank of Canada also indicate that this positive dynamic is expected to continue.
Despite the positive economic signals, the market is currently pricing in an 83% chance of a 25 basis point cut at the next meeting, with only a 17% chance that rates will remain unchanged. This suggests that concerns over tariffs and economic woes are weighing heavily on the Bank’s decision-making process.
This article was generated with the support of AI and reviewed by an editor. For more information, consult our General Terms and Conditions.
