Bank of Canada Expected to Cut Rates Amid Tariff Threats

By Promit Mukherjee

OTTAWA (Reuters) – The Bank of Canada is likely to lower its key benchmark rate by 25 basis points this week and will analyze the potential impact of U.S. tariffs on the Canadian economy, according to economists and analysts.

This marks the first rate decision announcement since the change in U.S. government, which is particularly significant given that the U.S. is Canada’s largest trading partner.

President Donald Trump, who assumed office last week, has threatened tariffs on Canadian imports, including a proposed 25% tariff effective February 1. These threats have generated confusion among investors and businesses, complicating economic forecasts.

Given the uncertain economic outlook due to tariffs, economist Thomas Ryan from Capital Economics suggests that the Bank of Canada will go ahead with a 25 basis points cut.

Currency swap markets are anticipating an 83% chance of a rate cut on Wednesday. Should the cut occur as expected, the benchmark rate would decrease to 3.0%, marking the sixth consecutive cut since June and reducing the rate by a total of 200 basis points.

In a recent Reuters poll, 80% of economists forecasted a quarter-point reduction, a smaller adjustment compared to the half-point cut in December. Most economists also noted the difficulty in predicting future rates due to tariff uncertainties hovering over the Canadian economy.

BoC Governor Tiff Macklem will announce the decision at 9:45 a.m. ET on January 29. The bank will also release its first monetary policy report of the year, updating previous projections for inflation and economic growth.

Economists are particularly interested in understanding how a potential 25% tariff could affect the Canadian economy and what the outcomes may be if Canada reacts with counter-tariffs. Senior Economist Jules Boudreau from Mackenzie Investments expressed interest in scenario analysis that illustrates the potential impacts of tariffs on the economy.

RBC’s Assistant Chief Economist Nathan Janzen echoed that the Bank must implement cuts to stimulate the economy and reduce unemployment, which remains higher than last year. He added that previous cuts have merely eased the economic brakes, rather than creating a significantly stimulative interest rate environment.