THE Bank of Canada is pulled in several different directions before his first interest rate decision of the year Wednesday.
On the one hand, signs of difficulties appear in the underlying sectors. inflation This could constitute an argument in favor of a longer maintenance of borrowing costs at a high level.
On the other: fears of a trade war with the United States. President Donald Trump has reiterated its threats to impose customs duties of 25 percent on Canadian products This could only take effect a few days after the central bank decision on rates.
“If Trump was to apply these 25 percent customs tariffs, and they have been in place for some time, unfortunately a recession in Canada would be inevitable,” said Stephen Brown, deputy chief economist for North America at Capital Economics.
A commercial blow like this would normally push the Bank of Canada to further reduce its rates in order to save economic growth. But a drop in rates too fast at a time when the Huard is already in difficulty risks further feeding inflation on imports from the south of the border.
What should a central bank do?
Economists who spoke to Global News say they are betting that the Banque du Canada will reduce its reference rate on Wednesday, although more modest than during the recent outings of the Central Bank.
Markets expect a new drop
The Banque de Canada’s reference rate of benchmark generally fixes the cost of borrowing across the country and acts as a signal for the rates that Canadians obtain on key loans such as property mortgages.
The central bank lowered its key rate of 1.75 percentage points during five consecutive decisions, by reducing it by 50 base points in October and December, against the background of signs of weakness of the economy and increasing fears that Inflation does not fall too much below the target of 2 percent. .
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The key rate is now 3.25 percent, the top of what economists consider the “neutral range”, in which borrowing costs do not stimulate or slow down growth.
Last week, the monetary markets had joined ratings up to 81 percent of a quarter -point drop on January 29, according to Reuters.
After quickly lowering the rate in 2024, the governor of the Bank of Canada Tiff Macklem pointed out after the last decision on rates last month that monetary decision -makers could adopt a “more progressive pace”. of softening in 2025.
Brown wonders if the Bank of Canada should act as quickly as it did in its most recent decisions, while signs indicate that the economy has probably accelerated by the end of 2024, while The previous rate reductions have started to recover growth.
Inflation has remained widely mastered, Cooling at 1.8 percent in DecemberThanks largely to the “holidays” of the GST/HST in Ottawa. But economists have noted that the three-month mobile averages of what is called “underlying inflation” are stubbornly maintained above 3 percent.
Reducing more interest rates, which is also likely to lower the Huard, already low, while we expect the US federal reserve to suspend its own rate reductions this week. A lower Canadian dollar can also feed inflation by making imports more expensive.
Benjamin Reitzes, director general of Canadian rates and macroeconomic strategists of BMO, says that inflation data alone does not justify another reduction in interest rates at the January 29 meeting.
Pricing threats alone are sufficient to cause damage
But then the question of prices arises.
Reitzes notes that Trump does not need to follow up on his pricing promise in the face of these threats that may harm the Canadian economy. Companies will probably slow their investments in Canada due to uncertainty; The Central Bank survey on companies, published last week, shows that two out of five companies expect negative impacts from the presidency of Trump.
In short, the Canadian economy should suffer a blow from Trump – the scale of this drop will depend on the implementation of customs prices, their magnitude and their duration during which they will remain in place, or s ‘They will remain simple hard words.
Rées adds to this table that, despite the discussions on a slowdown in the pace of softening measures, the “bias” of the Bank of Canada was always favorable to new reductions.
“If we put all this together, it is logical to reduce the rates of 25 basic points … Even if the inflation figures may not indicate this direction,” says Reitzes.
Brown is suitable that Canada Bank would likely “ignore” concerns about the inflation and weakness of the Huard if customs prices were implemented. But he says that it is “certainly not a clear decision” for the central bank this week.
The management that the Bank of Canada will take for the rest of 2025 remains uncertain, even if Reitzes and Brown both plan to decrease the key rate.
Everyone provides for three additional interest rate reductions this year to bring the key rate to 2.5 percent, even if Reitzes notes that rates will drop more sharply if customs tariffs are set up.
On the other hand, he says, if the American Fed reduces its less than expected reductions in a context of resilient economy, the Bank of Canada could also limit its low level in 2025.
The Bank of Canada will also publish a report on monetary policy on Wednesday – the first since Trump’s re -election – in parallel with the rate decision.
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