The markets are not expecting a cut, but there is a lot to think about
There was no interest rate decision in May so the most recent announcement from the Bank of Canada was back in mid-April, just two weeks after President Trump unleashed his tariffs on the world.
Since then, a lot has happened including tariffs pauses, some trade agreements, court decisions, and – over the weekend – new 50% tariffs imposed on US imports of steel, which the Canadian Steel Producers Association says: “essentially closes the US market to our domestic industry for half of its production.” It wants Ottawa to impose retaliatory tariffs as quickly as possible.
Then there is the latest GDP report showing 0.5% growth in the first quarter, the same as the last quarter of 2024.
Against that backdrop, is there some potential that the BoC might decide to make a pre-emptive rate cut this Wednesday to add some fuel to the economy? It’s not something the markets are expecting, but what do leading Canadian economists see ahead?
“Canada’s economy is strong enough for the Bank of Canada to remain on hold next Wednesday alongside other reasons for doing so,” said Scotiabank’s Derek Holt, explaining that the reasons include that the policy rate is already neutral, falling at a midpoint between the BoC’s 2.25-3.25% target range.
National Bank’s Matthieu Arseneau & Kyle Dahms believe that the current 2.75% rate is “too restrictive for prevailing economic conditions” and while they believe the BoC may “hesitate to act” at this week’s meeting, they think the policy rate could be 2% by year-end as the central bank is forced to provide support in the months ahead.
At RBC Economics, Nathan Janzen and Abbey Xu say the BoC’s June decision will be a close call but as economic data is showing the Canadian economy remains more resilient that feared, they think a second consecutive pause on rates is more likely than a cut at this stage.
Rishi Sondhi at TD Economics expects two more rate cuts this year, but not necessarily starting with this month.
CIBC Economics’ Andrew Grantham says the recent economic data gives the central banks “more time to judge incoming data and should see the current pause in interest rates continue at [this] week's meeting.”
And at BMO, Doug Porter also points to economic data as providing a “less pressing need” for the BoC to cut rates, adding: “We continue to believe that this is not the end of the line for rate cuts, but we are officially pushing back our timing of those trims, to restart in late July, and perhaps stretching into early next year.
However, there are economists who think there is a case for cuts as soon as Wednesday.
Desjardins’ Jimmy Jean notes that while there are some positives from recent data: “Indecisiveness comes at the expense of responsiveness. A June cut, by contrast, would allow the Bank to get ahead of a downturn at a time when upside tail inflation risks have diminished. In other words, if Macklem still takes the lags of monetary policy seriously, this is the moment for him to take the lead.”
