Author: Moumal Rathore
BENGALURU (Reuters) - The Bank of Canada will cut interest rates by 25 basis points to 3.00% on Jan. 29, according to a Reuters poll of economists, but many are wary of anything beyond that given uncertainty over U.S. tariffs and threats. There is no confidence in the prospects. Canada may respond.
The country’s central bank is one of the most aggressive in cutting interest rates in the world. Since June 2024, it has been reduced by 1.75 percentage points, which is very close to the neutral interest rate that neither restricts nor stimulates the economy.
But as U.S. President-elect Donald Trump returns to the White House on Monday, his threat to impose tariffs of up to 25% on Canadian imports looms over the economy even as it has produced some better-than-expected inflation and jobs data.
Several economists in a Reuters poll from January 10 to 16 said they had not yet factored in the impact of potential tariffs on their latest forecasts.
The picture is likely to be clearer next week when Canada outlines its response after Trump takes office, but most acknowledge it will be difficult to predict interest rates after the upcoming meeting.
"If Canada is hit with high tariffs and we don't retaliate, the deflationary effects could prompt the Bank of Canada to significantly ease monetary policy," said Derek Holt, head of economics at Scotiabank Capital Markets.
"If we do retaliate, then compliance with policy rates or even a rate hike is possible. Our outlook is highly uncertain at the moment and we may know more about the risks next week when Trump takes office."
A majority of 80% of economists (25 out of 31) expect a 25 percentage point rate cut on January 29, down from 0.5 percentage point in December. The rest are expected to pause.
The median forecast in the poll calls for another quarter-point rate cut in March and another cut next quarter, taking the overnight rate to 2.50%, below where interest rate futures are currently priced.
Whether 2.50% is truly the end for rates will depend on how relations with the United States develop after decades of free trade.
Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, said: "Tariffs are a clear, unambiguous negative impact on the Canadian economy, and if we do impose tariffs, the Bank of Canada may be forced to respond with lower interest rates. "
"I hope this is all temporary or doesn't happen at all, but there's no way of knowing what will happen," he said.
Canadian inflation fell to 1.9% in November from 2.0% in October and is expected to remain within the Bank of Canada's 1-3% target range in the coming quarters, averaging 2.1% this year and 2.0% next year.
Asked about possible deviations from this year's forecasts, all 14 economists except one said inflation was likely to be above rather than below their forecasts.
The economy is expected to grow by 1.8% this year and 1.9% next year, faster than 1.3% in 2024. The outlook is essentially unchanged from October polls.
(Additional reporting from Reuters Global Economic Poll)
(Reporting by Mumal Rathore and Pranoy Krishna; Polling by Vijayalakshmi Srinivasan; Editing by Ross Finley and Tomasz Janowski)