The Bank of Canada has remained relatively passive in the current economic environment, considering potential repercussions of U.S. tariffs on the economy. Some financial experts speculate that this passive stance may persist. Following a reduction of a quarter point last March, the central bank decided to maintain the key interest rate at 2.75 per cent in the months of April and June.
Unexpectedly, job statistics from the previous month exhibited an increase and core inflation rates stabilized at approximately three per cent. In light of these developments, many economists predict that the central bank may maintain the current status quo until its upcoming decision on July 30.
The central bank tends to lower its policy rate to stimulate expenditure and revitalize the economy. On the contrary, it keeps borrowing costs high when there are potential risks of inflation escalation. A majority of economists anticipate that the Bank of Canada will implement at least one or two more quarter-point reductions in the ensuing months. These lower rates could boost the economy amidst the ongoing trade feud.
However, a small faction comprising financial institutions such as RBC advocates against any further interest-rate reductions by the Bank of Canada for the interim. RBC’s Chief Economist, Frances Donald, suggests that the central bank might decide to lower the rates due to certain weak areas in the economy, such as the sluggish housing market and a drastic deceleration in sectors impacted by tariffs, like manufacturing.
As a counterargument, Donald posits a noteworthy question, ‘Would cuts in the Bank of Canada rate genuinely alleviate the issues plaguing the Canadian economy?’ Notably, the policy rate is an all-encompassing tool that affects all Canadians and every market, irrespective of their need for assistance. This significance of the policy rate means that socially, economically, and geographically diverse areas would be affected similarly by any changes.
For instance, the tariff-affected area of Windsor, Ontario, with an unemployment rate exceeding 11 per cent, would experience the same stimulus as Victoria, BC, with a jobless rate scarcely reaching 3.9 per cent. In such cases, Donald opines, implementing rate cuts might not be the ideal solution for a thriving economy like Victoria’s.
RBC suggests that regions like Windsor which require targeted support should focus on precise fiscal policy assistance from the government rather than banking on rate cuts. Over the previous year, the Bank of Canada has already reduced interest rates by 2.25 percentage points, and this facilitation is gradually infusing into the economy, according to Donald.
She believes that the central bank can now shift the responsibility of engendering more economic support to the federal government unless there are hints of imminent wider economic downturns. Donald asserts that RBC holds a comparatively optimistic projection of the economy compared to other forecasters, predicting improved growth over the following months buoyed by steady consumer spending and an anticipated resurgence in entrepreneurial confidence.
However, Oxford Economics, forecasting an ongoing recession in Canada throughout the year, also contemplates no additional rate cuts by the central bank. The firm anticipates an escalation in job losses, coupled with inflation soaring to three per cent by mid-2026, induced by tariffs and associated supply chain complications.
They argue that the Bank of Canada would prefer to counteract any potential inflation and is likely to maintain the current policy rate, even if the trade disputes inhibit growth. Donald shared similar sentiments that after the rampant inflation during the pandemic, consumers might be apprehensive about new price vs inflation trajectories surrounding them.
BMO currently forecasts three more interest rate cuts, with the last predicted for next March. However, BMO’s Chief Economist, Doug Porter, acknowledged growing opinions for diminished, if any, cuts. He suggested that the market’s expectations often serve as reliable indicators, currently predicting only one more rate cut.
Porter predicts increased federal government spending in the future, particularly in defence and infrastructure sectors, which could alleviate some burden from the Bank of Canada to decrease rates. Meanwhile, Stephen Brown, Deputy Chief North America Economist at Capital Economics, opines that expecting the central bank to halt cuts with an almost seven per cent unemployment rate and the economy’s output significantly below potential may be unrealistic.
On the contrary, with the bank’s benchmark interest rate at the neutral range middle point, neither boosting nor limiting economic growth, he predicts a drop to 2.25% before ending the relaxing cycle to help the economy navigate the trading volatility. Donald concurs with the Bank of Canada’s middle ground stance, arguing its position to lower interest rates required or keeping higher rates if inflation stays hard in the coming months. She doesn’t foresee immediate rate hikes but suggests the bank retains flexibility, maintaining the policy rate on hold until the data instructs a definite direction.