By Mumal Rathore

BENGALURU (Reuters) – The Bank of Canada will cut interest rates by 25 basis points to 3.00% on Jan. 29, according to a Reuters poll of economists. However, many were not confident about the outlook beyond that due to uncertainty around threatened U.S. tariffs and possible responses from Canada.

The country’s central bank has been among the world’s most aggressive in lowering rates, having cut by a cumulative 1.75 percentage points since June 2024. It is nearing a neutral rate that neither restricts nor stimulates the economy.

With U.S. President-elect Donald Trump returning to the White House, his threat of imposing tariffs as high as 25% on Canadian imports raises concerns for the Canadian economy, despite better-than-expected inflation and employment data.

Several economists in the Jan. 10-16 Reuters poll have yet to factor in the potential impact of tariffs on their forecasts.

Next week may provide clarity after Trump takes office and Canada’s response is outlined. Most economists acknowledged that forecasting rates beyond the upcoming meeting is challenging.

“If Canada gets hit with large tariffs and we don’t retaliate, then the disinflationary effects would likely prompt considerably more easing by the BoC,” said Derek Holt, head of capital markets economics at Scotiabank.

“If we do retaliate, then maintaining the policy rate or even hiking are possibilities. Our outlook at this point is highly uncertain, and we may learn a lot more about the risks next week when Trump takes power.”

An 80% majority of economists, 25 out of 31, expected a 25-basis-point rate cut on Jan. 29, a reduction from December’s half-percentage-point cut. The rest forecasted a pause.

According to the poll’s median forecasts, another 25 bps cut is anticipated in March, followed by one more next quarter, bringing the overnight rate to 2.50%, which is below current interest rate futures pricing.

Whether 2.50% will be the endpoint for rates depends on the future of relations with the United States after decades of free trade.

“Tariffs are a clear, unambiguous negative for the Canadian economy, and the Bank of Canada would likely need to react with lower rates if we do encounter tariffs,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets.

“I hope it’s all temporary or that it doesn’t happen at all, but there’s no way of knowing where this goes,” he added.

Canadian inflation eased to 1.9% in November from 2.0% in October but is expected to remain within the BoC’s target of 1-3% in the coming quarters, averaging 2.1% this year and 2.0% next year.

When asked about potential deviations in forecasts this year, all but one of the 14 economists said inflation could rise above rather than fall below their projections.

The economy is forecasted to grow by 1.8% this year and 1.9% next year, quicker than the 1.3% growth expected in 2024. This outlook is largely unchanged from an October poll.

(Other stories from the Reuters global economic poll)