By Promit Mukherjee
OTTAWA (Reuters) – The Bank of Canada is almost certain to trim its key policy rate by 25 basis points on Wednesday as a slew of factors, from potential cross-border tariffs to a reduced population target, keep the outlook for the economy muted.
Poor business investment, high unemployment and erratic consumer spending kept the economy under strain for most of last year. Gross Domestic Product missed the central bank’s third-quarter forecast.
Now with a prospect of U.S. President Donald Trump imposing 25% tariffs on Saturday looming over Canada, the BoC will be under pressure to prop up the economy through lower interest rates, analysts and economists said.
“It would shock everybody if they did not,” said Étienne Bordeleau-Labrecque, portfolio manager at Ninepoint Partners, on market expectations of a rate cut.
He said the BoC’s monetary policy report will be closely watched to see how the curbs on immigration and potential tariffs from the United States impact growth and inflation this year and next.
The BoC will announce its decision at 9:45 a.m. ET (1345 GMT) on Wednesday. The announcement will also accompany its Monetary Policy Report, a quarterly document that gives the latest projections for inflation and economic growth.
Currency swap markets are betting that the odds for a 25-basis-point rate cut are over 98%, and a Reuters poll published this month said 25 out of 31 economists expect a quarter-point rate cut to 3%, a step down from December’s half-percentage-point move..
Economists have said that based on the extent of tariffs and how Canada retaliates, there is a potential risk of persistent inflation, a spike in unemployment and lackluster demand, a situation known as stagflation, which the bank has tried hard to avoid through consistent rate cuts.
“This is the communications challenge the bank has because all of these scenarios have very different outcomes,” said Randall Bartlett, senior director of Canadian economics at Desjardins.
“The bank doesn’t want to make monetary policy decisions on ‘what if’ scenarios,” he said, but added that the market would still want to clearly know the BoC’s expectations.
If the bank’s decision aligns with market expectations, it will be the sixth time in a row that the BoC will have reduced borrowing costs with a cumulative 2 percentage points in a space of seven months.
(Reporting by Promit Mukherjee; Editing by Mark Porter)
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