New report challenges expectations for further rate reductions
Royal Bank of Canada says the Bank of Canada has likely completed its current cycle of interest rate cuts, diverging from projections by other major Canadian lenders. This assessment comes as trade tensions ease, government spending increases, and the country’s economic prospects show improvement.
A report from Financial Post highlighted that RBC economists, including chief economist Frances Donald, highlighted significant shifts since March, when concerns over potential 25% tariffs from US president Donald Trump loomed. “While Canada’s economic path forward remains challenging, it appears considerably less treacherous than it did just a few months ago – a narrative that has yet to permeate the Canadian psyche,” Donald and her team stated in a report released on Friday.
The threat of large-scale US tariffs has receded. Canada now faces the lowest US tariff rate among major trading partners. April data from the US Census Bureau showed nearly 90% of US imports from Canada were duty-free, with an average effective tariff rate of 2.3%.
Although consumer sentiment dropped sharply in March, Donald said those fears have not resulted in severe economic fallout. Employment data has been mixed, but consumer spending remains relatively strong.
Furthermore, Canada is expected to leverage substantial fiscal support to bolster its economy. While the new government’s budget is pending, measures such as tax deferrals, loan programs, and employment insurance initiatives are anticipated to aid sectors affected by tariffs in the short term. RBC also suggested that the recently announced increase in defence spending could contribute “significantly” to economic growth in 2026.
Stronger US outlook lifts Canada
The economic outlook for the US has also improved, enhancing Canada’s prospects. Fears of a US recession, which surfaced after Trump imposed widespread tariffs on Liberation Day, have subsided with the de-escalation of trade tensions. RBC has upgraded its forecast for US gross domestic product in the second quarter, from 1% to 2.5%, and raised its outlook for Canada’s 2026 growth from 1% to 1.3%.
“We think the [Bank of Canada] is now at the end of its cutting cycle and do not expect further reductions,” Donald said, adding that this projection is “contingent on the economic growth backdrop and labour markets stabilizing.”
The Bank of Canada has held its policy rate at 2.75% for two consecutive meetings, after leading global peers with early and aggressive cuts. RBC believes the 2.25 percentage points already cut will continue to filter through the economy, while fiscal policy addresses short-term tariff effects. Despite higher-than-expected core inflation in April, which “unnerved” central bankers, RBC said Canada’s retaliatory tariffs on US goods are unlikely to exert major price pressure.
Most of the other Big Six banks foresee additional cuts. Some expect the overnight rate to fall to 2.25% this cycle, with Bank of Montreal projecting 2% by 2026.
However, former Bank of Canada governor Stephen Poloz recently warned against assuming more cuts. “Having learned that lesson the hard way, I think central banks are going to be much more preoccupied with inflation risks,” he stated, referring to the post-pandemic inflation surge that caught policymakers off guard.
