Bank of Canada Rate Cut Forecast

Capital Economics predicts that the Bank of Canada may reduce its policy rate by 25 basis points in the upcoming meeting, despite some economic data suggesting a pause. The uncertainty is largely due to ongoing tariff threats impacting the economic outlook.

In December, the Bank faced a close decision on cutting the policy rate, ultimately opting for a 50 basis point reduction instead of 25 to align with the neutral rate range of 2.25% to 3.25%. This was meant to avoid a restrictive stance.

Post-rate cut, the Bank’s tone shifted to be more cautious, indicating a move away from automatic reductions, emphasizing a careful evaluation of future necessary changes. Governor Tiff Macklem highlighted a gradual approach to easing policies during the press conference.

Recent economic indicators have been positive, with October’s GDP and preliminary November estimates suggesting a 2% growth rate for Q4, consistent with the Bank’s projections. Additionally, business and consumer surveys indicate potential for continued growth.

Despite these positive signs, market expectations lean toward an 83% chance of a 25 basis point decrease at the next meeting, with only a 17% likelihood of rates remaining steady. This indicates that tariff concerns and other economic challenges heavily influence the Bank’s decisions.

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