BoC's Next Move in Focus: Hold Steady or Cut Further?

Amid heightened economic uncertainty, an impending federal election, and strained relations with the United States, Canadians are closely watching the Bank of Canada's upcoming interest rate decision this week. The central bank has lowered rates in seven consecutive meetings, including two quarter-point reductions this year, since it began easing monetary policy last summer, bringing the overnight rate down from a high of 5% to its current 2.75%.

The Bank of Canada is set to make its interest rate announcement this Wednesday, April 16. Canadians are keenly anticipating whether there will be another cut, which would mark a third consecutive reduction in 2025.

Governor Tiff Macklem and his central bank officials are currently weighing the decision to either pause their rate-cutting strategy or continue with further reductions. Interest rate swap markets, reflecting investor sentiment on monetary policy, indicate a roughly 60% chance that the Bank of Canada will hold steady and a 40% likelihood of a cut—an unusually even split compared to prior rate decisions. Scotiabank describes this as a "nervous hold," recognizing the strong arguments presented by both sides of the debate.

Some economists believe the BoC may decide to hold off on further cuts due to U.S.-imposed tariffs affecting Canadian exports, raising significant economic concerns. They argue that, notwithstanding tariffs, the Canadian economy has shown resilience, with strong growth, increasing consumer spending, and robust auto sales. These factors have slightly pushed up inflation. Given Canada's exemption from U.S. President Trump's reciprocal tariffs, and to avoid accusations of political bias ahead of the April 28 national election, the Governing Council has reasons to maintain the overnight rate target at 2.75%.

Conversely, some analysts anticipate that the Bank of Canada might lower borrowing costs. Following Trump's announcement of substantial tariffs on various countries, which he later paused for 90 days after a significant market sell-off, traders have increased their expectations for a rate cut. Experts suggest that while markets temporarily rebounded after the tariff delay, the long-term economic impact is beginning to surface. Although Canada hasn't been the hardest hit, declining consumer and business confidence, as highlighted by the BoC's quarterly survey, may prompt a rate cut to assist Canadians in navigating current economic challenges. Furthermore, the unexpected loss of 33,000 jobs in March, as reported by Statistics Canada, along with a slight increase in the unemployment rate to 6.7%, adds to the speculation of a potential rate cut.

A decisive factor could be March's CPI, scheduled for release the day before the meeting. "Inflation will play a key role in the Bank of Canada's decision next week, determining whether February's inflation rebound was a temporary blip or the start of a longer-term trend," says CPA Canada's chief economist, David-Alexandre Brassard. A normal monthly inflation rate is expected at 0.6%, but a lower-than-expected figure could lead to a rate cut.