Bank of Canada expected to cut rates in first announcement of 2025 as the threat of U.S. tariffs looms large.ETHAN CAIRNS/The Canadian Press
The latest on Bank of Canada's Jan. 29 interest rate decision
The Bank of Canada cut its benchmark interest rate by a quarter-percentage-point to 3 per cent on Wednesday and warned that the Canadian economy “would be tested” if a trade war breaks out with the United States. It also announced the end of quantitative tightening.
The bank downgraded its GDP growth forecast, and published analysis showing high tariffs would likely push the Canadian economy into a recession and add to inflation.
Governor Tiff Macklem and senior deputy governor Carolyn Rogers will hold a press conference at 10:30 a.m. ET.
Further reading:
- Trump says Bank of Canada modelling suggests potential recession from U.S. tariffs
- Trump says 25% tariffs on goods from Canada, Mexico could come Feb. 1
- Canada has what the U.S. needs. How the country can fight back in a trade war
- How should Canadian consumers prepare for a looming trade war?
- Canadian mortgage rates could be in for a bumpy ride in the Trump era
- A recent history of Bank of Canada's interest rate decisions
Find updates from our reporters and columnists below.
2:40 p.m.
U.S. Federal Reserve keeps rates steady, drops reference to inflation ‘progress’ from policy statement
– Reuters
The Federal Reserve held interest rates steady on Wednesday and gave little insight into when further reductions in borrowing costs may take place in an economy where inflation remains above target, growth continues, and the unemployment rate is low.
After several months in which inflation data have largely moved sideways, the U.S. central bank dropped from its latest policy statement language saying that inflation “has made progress” towards the Fed’s 2 per cent inflation goal, noting only that the pace of price increases “remains elevated.”
Recent key inflation readings remain about half a percentage point or more above the Fed’s target.
Fed officials say they largely believe the progress in lowering inflation will resume this year, but have now put rates on hold as they await data to confirm it.
“Economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid,” the central bank’s policy-setting Federal Open Market Committee said in a statement after the end of its latest two-day meeting.
12:13 p.m.
What’s next?
- The U.S. Federal Reserve will announce its latest rate decision later today at 2 p.m. ET. The central bank is widely expected to hold its benchmark interest rate steady in the 4.25-per-cent to 4.5-per-cent range. Fed Chair Jerome Powell will hold a press conference at 2:30 p.m. ET. Watch for his comments on the potential impact of tariffs, as well as his reaction to President Donald Trump saying interest rates should be lower. Presidents don’t give orders to the independent Fed, so Mr. Trump’s remarks put Mr. Powell in a tough spot.
- The biggest question mark right now for the Canadian economy is whether Mr. Trump will follow through on his tariff threats. He has said he could slap a 25-per-cent tariff on Canadian goods as early as Saturday, Feb. 1, and has tasked his administration with coming up with protectionist trade measures by April 1. Watch those dates.
- The Bank of Canada’s next interest rate decision is on March 12. Financial markets put the odds of another quarter-point rate cut at roughly 40 per cent, according to LSEG data. Traders are pricing in between one and two more rate cuts this year.
- Statistics Canada will publish January inflation numbers on Feb. 18. The January Labour Force Survey will be out on Feb. 7, while Q4 GDP numbers come Feb. 28.
11:50 a.m.
Opinion: With tariff threats and prorogued Parliament, the Bank of Canada was right to cut rates again
– Jeremy Kronick and Steve Ambler
If there were no massive trade threat coming from south of the border, it’d be unclear whether a cut this time around would have been necessary. However, in the presence of that threat, the bank was correct in choosing to take out some insurance for the Canadian economy.
It is important to first look at what the numbers tell us. However, there are two major risks to Canada’s economic outlook that are on everyone’s minds: the threat of significant tariffs imposed by the Trump administration, and the lack of a functioning Parliament, which has been prorogued until the end of March.
10:59 a.m.
Key quotes from Tiff Macklem during the announcement press conference
On the loonie:
“If you’re asking us, ‘Has the movement in the Canada-U.S. exchange rate constrained our monetary policy decisions to this point,’ the answer is no. … The recent depreciation we’ve seen in the Canadian dollar has been more driven, in our view, by trade uncertainty, and particularly [U.S.] President Trump’s threats to impose 25-per-cent tariffs on Canadian exports. You can see that from a number of things, but in particular, if you look at the timing of the depreciation, it follows very closely on President Trump’s threats.”
“Depreciation [of the Canadian dollar] makes our exports more competitive. Of course, the threats of tariffs will make them much less competitive, but it also has some other impacts. It means that everything we import, the cost of things we import, will be higher, and you will start to see that relatively quickly on things like fresh fruit and vegetables, which, obviously it’s winter in Canada, we import a lot of those from the United States. That’ll get passed through pretty quickly. More generally, pass-through tends to be pretty slow, and tends to evolve over time.”
On tariffs and rates:
“A further cut made some sense. Then you look out the window and the threat of tariffs is there, and there’s no doubt that that weighed on our decision. The more we can get the economy on a solid footing before it faces possible new tariffs, the better. And from that risk management perspective, I think that reinforced the decision to cut the policy rate by 25 basis points.”
On handling a ‘stagflation’ scenario:
“This is a complex shock for monetary policy, because growth will be weaker, inflation will be higher. We can’t lean against weaker growth and higher inflation at the same time. So what are we going to be doing? Well, we’re going to be assessing the relative weight of those two. If the weakness on the economy that comes through as a result of tariffs and the downward pressure that’s putting on inflation comes faster and is bigger than the upward pressure … I expect we’ll be focusing more on supporting growth. On the other hand, if the inflationary pressures come through faster and are bigger, monetary policy is going to have to be more focused on guarding against persistent inflation.”
10:56 a.m.
Economists' immediate reaction to the quarter-point drop
Here’s how economists reacted immediately after this morning’s rate decision:
Stephen Brown, deputy chief North America economist, Capital Economics
With the economy doing better recently, the Bank of Canada’s decision to cut by 25bp today might have been a much closer call were it not for the looming threat of US tariffs. Any tariffs could hit the economy hard, but the Bank hinted today that it might have to refrain from providing monetary policy support, because otherwise there could be a risk that inflation takes off again. That is in turn a risk to our view that the Bank will cut twice more this year. ...
Strikingly, in its policy statement, the Bank dropped the line from December that “we will be evaluating the need for further reductions in the policy rate one decision at a time” and it was not replaced with anything resembling forward guidance. That decision may reflect the fact that the policy rate is now within the Bank’s 2.25% to 3.25% neutral range estimate, or it may reflect uncertainty about how the Bank might need to respond if tariffs are imposed. In the press conference opening statement, Macklem’s comments make it sound like the Bank does expect some tariffs to be applied. He will tell us that “as we consider our monetary policy response, we will need to carefully assess the downward pressure on inflation from weakness in the economy, and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions.” That suggests the Bank is taking the lessons from the pandemic seriously and that it will not necessarily cut interest rates further, even if tariffs hit the economy hard.
Avery Shenfeld, managing director and chief economist of CIBC Capital Markets
The Bank of Canada isn’t certain about what comes next, but then again, who is? … Our judgement is that rates, including 5-year mortgages, are still too high to deliver the necessary lift, including the Bank’s projection for strength in residential construction. The combination of a labour market that the Bank describes as “soft” and underlying inflation judged to be near 2% tilts the policy balance towards a further 75 bps in cuts in our forecast, particularly as the tariff threat weighs on confidence. On tariffs, the Bank is in the throes of a major research effort, but seems to believe, as we do, that a trade war would have only a temporary lift to inflation, but could entail a material hit to growth that wasn’t factored into their forecasts.
James Orlando, director and senior economist, TD Economics
This more conservative approach makes sense for an economy that churned out 91k jobs last month and is likely to see solid GDP growth for the fourth quarter of 2024 of around 2%. At the same time, inflation remains under control, allowing the BoC to focus on the state of the economy. This approach also mitigates the risk that the policy rate diverges too much from the Fed (which is clearly on hold). … We are still hopeful that tariff threats are more of a negotiation tactic, meaning they would be temporary and carry less long-term impacts. Yet, this is a tail risk that remains front and centre in the mind of the BoC. Our baseline forecast remains that the BoC will cut rates to 2.25% by year-end, but should 25% tariffs come into play for more than a few months, we’d expect the central bank to cut more aggressively in order to cushion the economy.
Taylor Schleich, Ethan Currie and Warren Lovely, economists at National Bank Financial
If we were to somehow get through the coming weeks unscathed by tariffs, we could see the BoC leaving rates unchanged in March given firmer inflation and improving economic conditions. That doesn’t mean there’s no scope for further rate relief in a “friendlier” geopolitical environment, but more graduality would certainly be warranted. We’ll all (hopefully) have better clarity on the likely BoC rate path by next week.
Further reading: More rate cuts likely on the way, markets and economists suggest after today’s BoC decision
10:45 a.m.
A weak loonie and tariffs could be a double-whammy for grocery inflation
![](https://www.theglobeandmail.com/resizer/v2/XICQUNJNS5FWPHJFCVRPZFSVE4.jpg?auth=9c948a2ca4d62e79c4bd9aa05daef7d3f90d439a7c404732a1aa76033d8a6c37&width=600&quality=80)
A customer shops in the produce section at a Metro grocery store in Toronto on Friday, Feb. 2, 2024.Cole Burston/The Canadian Press
As the Bank of Canada gauges the potential ramifications of a trade war with the U.S., grocery prices might emerge as an especially vulnerable spot.
Food was one of the trickiest components of the consumer price index for the central bank to wrestle back under control during the latest bout of inflation. Now a trade spat with the U.S. could reignite the fire under grocery prices for two reasons, food experts warn.
The very threat of U.S. tariffs, among other factors, sent the value of the loonie plunging against the U.S. dollar in the fall, though Canada’s currency has so far been stable in the range between 69 US cents and 70 US cents in January.
The weaker Canadian dollar puts upward pressure on the prices of fresh produce that Canada imports – paying in U.S. dollars – from the U.S., Mexico and South America during this time of the year.
But the actual imposition of U.S. tariffs and Canadian countertariffs would then compound the inflationary push, said Evan Fraser, director of the Arrell Food Institute at the University of Guelph.
Ottawa has floated the idea of imposing countertariffs on goods including orange juice from Florida and peanut butter from Kentucky as part of a possible plan to hit back at the U.S. Those measures would amount to an extra levy on those U.S. food imports, a tax Canadian consumers are ultimately likely to pay as suppliers pass the additional costs on to grocery shoppers.
How should Canadian consumers prepare for a looming trade war? (Hint: Don’t stockpile orange juice)
U.S. tariffs would be paid by U.S. importers and ultimately hit American households. But they would also deal an indirect blow to Canadians’ pocketbooks, including at the supermarket.
That’s because even food made in Canada and headed for Canadian grocery stores often crosses over into the U.S. as it travels through the supply chain, Prof. Fraser said.
This is often true even of single-input items such as produce, he said. Canadian-grown blueberries, for example, are often washed, sorted and packaged in Washington state before heading back to Canada, he added. The presence of U.S. tariffs and Canadian countertariffs could add layers of taxes as the food moves across the border, he added.
And tariffs, especially if applied broadly, would also drive up the price of what producers need to grow food, from farm and greenhouse equipment to plants themselves, in some cases.
“All those things that result in a clamshell full of lettuce or some olivine tomatoes, you think that that’s pretty much as simple a supply chain as you can imagine. If you break that out into all the constituent parts and all the supply chains that feed into that, there’s so many borders that are crossed and in particular the U.S.-Canada border,” he said.
“I am very worried about this situation,” he said.
10:32 a.m.
Bank of Canada expects housing market to continue to rebound
The Bank of Canada expects the rebound in the residential real estate market to continue after the central bank made its sixth straight cut to the benchmark interest rate.
Since the bank made its first cut in June, home sales have been on the rise. The volume of transactions in the most recent fourth quarter was close to the 10-year average after about two years of slow sales.
In announcing today’s 25-basis-point interest rate reduction to 3 per cent, the Bank of Canada said its previous cuts have started to strengthen the country’s economy.
“Lower borrowing costs are boosting activity in the housing market as well as consumer spending on big-ticket items like automobiles,” Governor Tiff Macklem said in a statement posted on the bank’s website.
In its Monetary Policy Report, the bank said that there are already signs that the threat of U.S. tariffs on Canadian goods was weighing on consumer and business confidence and investment intentions.
How that will impact the housing market is unclear. Realtors and mortgage brokers had mixed reports with some saying that their buyers were moving ahead with their plans and others saying their clients were uncertain about whether to make a big purchase.
10:28 a.m.
Analysis: Tariffs could knock inflation expectations off course
There is plenty of reason for cheer in the Bank of Canada’s latest rate decision. Inflation is largely under control, close to the central bank’s 2-per-cent target. Inflation expectations are nearly back to normal. And because the bank has been easing monetary policy for a while – the BoC made its sixth consecutive rate cut on Wednesday, taking the benchmark interest rate to 3 per cent from a recent peak of 5 per cent – economic activity is picking up.
But of course, all these positives are something of an afterthought: with Canada facing imminent 25-per-cent tariffs on product shipments to the United States, any upbeat take on the economy can crumble in an instant.
“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada,” said Bank of Canada Governor Tiff Macklem in the prepared remarks of his opening statement on Wednesday.
“Unfortunately, tariffs mean economies simply work less efficiently – we produce and earn less than without tariffs. Monetary policy cannot offset this,” he added.
The bank’s quarterly Monetary Policy Report delves into potential impacts of sweeping U.S. tariffs.
At a minimum, the report says, a permanent tariff will lead to a one-time, permanent increase in price levels.
“Whether tariffs lead to ongoing inflation will mostly depend on how household and business expectations for inflation respond to tariff-related price level increases. When expectations are well anchored to the inflation target, tariff-related price increases will have less of an effect on other prices and wages.”
Here’s the rub: Canadian and American consumers have gone through a punishing period of inflation. While inflation expectations are getting back to normal, according to BoC surveys, they seem particularly fragile. (Source: Talk to any regular person about how the economy is doing, and they invariably mention high prices. Or take a look at how incumbent parties are getting crushed in elections, with voters getting payback for the cost-of-living crisis.)
This puts central bankers in a tough spot. Expectations are important, because they affect consumer and company behaviour on price-setting, wages and so on.
If expectations become dislodged, a price shock could devolve into something much worse.
10:25 a.m.
Key quotes from Macklem’s opening statement
On inflation:
“While we expect some volatility in CPI inflation due to temporary tax measures, our forecast is that inflation will remain close to the 2% target over the next two years.”
On growth:
“There are signs economic activity is gaining momentum as past interest rate cuts work their way through the economy.”
On labour market:
“Employment has strengthened in recent months. But with job creation having lagged labour force growth for more than a year, the labour market remains soft.”
On U.S. tariff uncertainty:
“We don’t know what new tariffs will be imposed, when or how long they will last. We don’t know the scope of retaliatory measures or what fiscal supports will be provided. And even when we know more about what is going to happen, it will still be difficult to be precise about the economic impacts because we have little experience with tariffs of the magnitude being proposed.”
On monetary policy’s potential response to tariffs:
“Unfortunately, tariffs mean economies simply work less efficiently — we produce and earn less than without tariffs. Monetary policy cannot offset this. What we can do is help the economy adjust.”
10:23 a.m.
How markets are reacting to the Bank of Canada decision
The Canadian dollar got a little bit of a pop on the Bank of Canada’s interest rate decision, rising almost immediately from 69.12 to 69.34 US cents. However, it’s already starting to retrace some of that gain, and it continues to be well within its trading range of the past month.
Prior to the decision, the loonie was trending weaker, mostly because of strengthening in the U.S. currency this morning rather than any domestic factors. Bond yields are slightly weaker, with the two-year Canadian bond yield down by about three basis points following the BoC decision - modestly outpacing a decline of about one basis point in its U.S. counterpart.
Over all, a pretty subdued market reaction, and it’s not all that surprising when you look at what money markets are pricing in for future BoC moves - and all the uncertainty that’s swirling over tariffs. Implied probabilities in overnight swaps markets suggest there’s a 44 per cent chance the central bank will cut rates by another 25 basis points at its next meeting March 12 - so, pretty even odds. Money markets are clearly signalling, however, that the Bank of Canada isn’t finished with monetary easing. They are fully pricing in another quarter-point cut by some time this spring, and are close to pricing in 50 basis points of additional cuts by the end of this year.
10:10 a.m.
Four early takeaways for your personal finances after today’s BoC rate decision
Four thoughts on today’s rate cut for …
Home buyers and people renewing mortgages: Today’s rate should put variable-rate mortgages more or less in line with fixed-rate mortgages with terms of three and five years, which is to say in the low-4-per-cent range. The case for going fixed: You can ride through the next several years with zero concerns about how your mortgage costs would be affected by economic developments. The case for variable: Further rate cuts, if there are any, would cut your cost of borrowing, and you could lock into a fixed-rate mortgage then.
Savers: Expect a 0.25 of a percentage point cut in savings accounts at many of the alternative banks that offer the best rates. Interest rates on savings have declined back to weak levels that barely keep up with inflation in many cases. Here’s a good website for comparing rates on savings.
People with balances on their home equity line of credit: HELOCs just got cheaper by 0.25 of a percentage point. We’re still talking a rate of 5.2 per cent for HELOCs priced at their lender’s prime rate, which is a hefty price to pay for borrowed money.
Investors with parked cash: Expect a decline in returns from three popular investment products for holding cash: investment savings accounts that are packaged like mutual funds, high interest savings exchange-traded funds and ETFs holding T-bills and other money market securities. Expect the yield on these products to edge down to 2.5 to 3 per cent, which is still ahead of inflation and enough to justify keeping money on the sidelines in the near term.
10:02 a.m.
Good news for variable-rate mortgages with today’s BoC rate cut
![](https://www.theglobeandmail.com/resizer/v2/7EC7KSEEHRBLDA7Y4PH6NRSX4Q.jpg?auth=0e6e8a6bd58c259f78f282f5cf55186d3730f693aa88af9cb858eeb7fc558e0a&width=600&quality=80)
Houses are seen in a neighbourhood on Burnaby Mountain, in Burnaby, B.C., on June 10, 2024.DARRYL DYCK/The Canadian Press
Variable-rate mortgages will continue to shed their pariah status with today’s interest rate cut.
The mortgage was shunned during the Bank of Canada’s inflation-squashing cycle in 2022 and 2023, as the loan’s interest rate increased every time the central bank raised its benchmark lending rate.
Not only were the floating-rate mortgages more expensive than fixed-rate mortgages, homeowners who took out variable-rate products during the pandemic’s real estate boom were feeling the pain of the higher interest rates.
But now that the Bank of Canada has cut interest rate six times since June to 3 per cent from 5 per cent, the cost of the variable-rate mortgage has dropped significantly.
The five-year variable-rate mortgage had an average interest rate of 4.55 per cent as of early January, compared with 6.23 per cent a year ago, according to data from Mortgagelogic.news.
That is pushing the variable-rate product closer to the price of a fixed-rate mortgage, where the interest rate stays the same over the course of the loan term.
The five-year fixed-rate mortgage had an average interest rate of 4.29 per cent earlier this month, compared with 5.07 per cent a year ago, according to Mortgagelogic.news.
Lenders and mortgage brokers report a resurgence in demand for the variable-rate product. “Variable has already shed its bad rap,” said Dan Eisner, the chief executive of True North Mortgage.
9:57 a.m.
BoC warns U.S. tariffs could send Canadian economy into a recession
The Bank of Canada is warning 25-per-cent U.S. tariffs, along with retaliation from Ottawa, could send the economy into a recession and drive up inflation within the first year of a trade war.
In its quarterly monetary policy report released today, the central bank doesn’t include tariffs in its baseline economic projections and acknowledges its figures are subject to significant uncertainty owing to the Trump administration’s looming tariff threat.
Instead, it simulates the potential impact of 25-per-cent tariffs on all Canadian imports as well as retaliatory tariffs of the same magnitude on U.S. imports. That modelling suggests growth in Canada could be up to three percentage points lower in the first year of a trade battle. The effect of tariffs on growth tapers out in the second and third years of tariffs.
Its baseline economic projection, which doesn’t include U.S. tariffs, points to 1.8-per-cent growth in real gross domestic production in both 2025 and 2026.
The central bank’s tariff simulation suggests if the economy responds in line with historical patterns, inflation would be 0.1 percentage points higher in the first year tariffs are implemented, then 0.5 and one percentage points higher in the second and third years, respectively. However, faster pass-through of costs to consumers could increase inflation by 0.8 percentage points in the first year, and by 1.3 and 0.6 percentage points in the second and third years, respectively.
Read more here: Bank of Canada modelling suggests potential recession from U.S. tariffs
9:45 a.m.
BoC cuts rate by quarter-point to 3%
The Bank of Canada cut its benchmark interest rate by a quarter-percentage-point on Wednesday and warned that the resilience of Canada’s economy “would be tested” if a trade war breaks out with the United States.
As widely expected, the central bank lowered its policy rate to 3 per cent from 3.25 per cent, its sixth consecutive cut. It also announced the end of quantitative tightening (QT) – a years-long push to shrink the size of its balance sheet after its early pandemic bond-buying spree.
With inflation largely under control, the bank has been easing borrowing costs since last summer, and policy makers had been expecting economic growth to pick up steam. The threat of U.S. tariffs, however, has thrown a major curveball at the Canadian economy and the central bank.
“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada. At the same time, the higher cost of imported goods will put direct upward pressure on inflation,” Bank of Canada Governor Tiff Macklem said, according to the prepared text of his press conference opening remarks
U.S. President Donald Trump has threatened to put a 25-per-cent tariff on all Canadian imports, perhaps as early as this Saturday, Feb. 1.
He has also tasked his administration with developing a series of trade measures aimed at reducing the U.S. trade deficit with Canada and other countries by April 1. “Unfortunately, tariffs mean economies simply work less efficiently – we produce and earn less than without tariffs. Monetary policy cannot offset this. What we can do is help the economy adjust,” Mr. Macklem said.
Read more here: Bank of Canada cuts rate by quarter point, highlights tariff risk
9:25 a.m.
Tariff threat creates risk of hard-to-manage “stagflation”
U.S. President Donald Trump’s threat to slap large tariffs on Canadian goods puts the Bank of Canada in a tough spot.
A trade war could easily push the Canadian economy into a recession. But retaliatory tariffs against the United States, alongside the inevitable depreciation of the Canadian dollar, would also increase the price of imported goods, adding to inflation.
Economists call this tricky combination of slower growth and higher inflation “stagflation.” It pulls the central bank in opposite directions. Should policy makers cut interest rates to support the economy? Or should they raise rates to head off inflationary pressures?
Tim Lane, a former Bank of Canada deputy governor who retired in 2022, said the bank’s response will likely depend on the size of tariffs and countertariffs, as well as how much the Canadian dollar depreciates against the U.S. dollar. Given the circumstances, however, the bank is more likely to focus on the threat to economic growth than the near-term jump in prices, Mr. Lane said.
“On the whole, it’s more likely to be a downside risk to growth and inflation, just given the balance of power between the U.S. and Canada and the fact that Canada is less likely to retaliate on the same scale,” he said in an interview.
“There will be an effect [on import prices] from the exchange rate. But unless the exchange rate depreciation is very disproportionate, then it seems unlikely that the bank would be deterred from trying to react a bit,” he said, referring to possible rate cuts.
The Canadian exchange rate is already near a four-year low of just under 70 US cents. Tariffs would send it lower.
However, that’s not necessarily a bad thing from the Bank of Canada’s perspective. The bank sees the exchange rate as a “shock absorber” that can offset some of the negative impact of tariffs: a weaker loonie makes Canadian exports more competitive in foreign markets.
There are also questions about just how inflationary countertariffs and loonie depreciation would actually be.
A 2015 report by the Bank of Canada estimated that a 10 per cent depreciation in the Canadian dollar increases core inflation by around 0.3 percentage points and total Consumer Price Index (CPI) inflation by 0.6 percentage points.
Moreover, only a third of Canadian consumer goods imports actually come from the United States, Randall Bartlett, Desjardins’ senior director of Canadian economics, noted in a report on Tuesday. That suggests the effect of countertariffs on overall CPI inflation could be relatively limited.
“All told, we believe inflation will rise toward 3 per cent year-over-year by early 2026 if Canada engages with the U.S. in a trade war. However, there is ample reason to believe it won’t go so far outside of the Bank of Canada’s 1 to 3 per cent operating range that it would prevent the bank from cutting short-term interest rates in response to weaker demand,” Mr. Bartlett wrote.
9 a.m.
A look at the Canadian dollar before today’s Bank of Canada decision
The loonie has been within a relatively narrow range of just above 69 US cents to just below 70 US cents over the past month.Mark Blinch/Reuters
You might think with all that’s going on in the political world - including the threat of severe U.S. tariffs and a looming Canadian federal election - that our domestic currency has had a volatile and difficult month. But not so much, actually; it’s been little more than range-bound in January.
Will today’s central bank policy decisions in Canada and the United States shake things up? It seems unlikely, given money markets have overwhelmingly priced in a 25-basis-point rate cut by the BoC this morning and a steady-as-she-goes decision on Fed short-term interest rates this afternoon. If the two central banks do as widely expected, it doesn’t give much to trade on.
The loonie has been within a relatively narrow range of just above 69 US cents to just below 70 US cents over the past month. Contributing to that of late: the U.S. dollar has been trending weaker against major currencies since peaking on Jan. 13.
When looking at technicals, which are critical when it comes to currencies, this is quite supportive for the Canadian dollar. The currency is building strong support above 69 US cents, a welcome development for many who witnessed it fall by nearly five US cents this past autumn.
Shaun Osborne, chief FX strategist at Scotiabank, said in a note Tuesday: “USD/CAD technical signals have shifted more constructively for the CAD over the past week or two. There are clear signals that the USD bull trend is tiring… ."
In other words, the loonie might finally see some recovery in the days ahead. Much depends, mind you, on what happens on tariffs.
As always for the loonie, something to watch is the interest rate differential between the U.S. and Canada. Owing to its weaker economy, the Bank of Canada has been much more aggressive in cutting interest rates than the Fed. Money has been flowing more freely to higher-yielding U.S. bonds, powering the greenback and clipping the loonie’s wings.
But if the Bank of Canada starts to send convincing signals that it’s nearing the end of monetary easing, while the Fed suggests a willingness to cut short-term rates later this year, these market dynamics may start to shift.
8:20 a.m.
What do markets and analysts expect?
Another rate cut from the Bank of Canada is a done deal, according to financial markets. Interest rate swap markets, which capture investor expectations about monetary policy, put the odds of a quarter-point cut on Wednesday at around 98 per cent, according to LSEG data.
Markets are pricing in one to two more quarter-point cuts in 2025, beyond Wednesday’s decision. That would bring the policy rate to 2.75 per cent or 2.5 per cent.
Meanwhile, 25 out of 31 economists polled by Reuters last week expected a quarter-point cut on Wednesday. The poll’s median forecast showed two more cuts in the coming months, which would bring the policy rate to 2.5 per cent by the summer. However several analysts noted that uncertainty around tariffs has made forecasting extremely difficult.
7 a.m.
BoC expected to cut policy rate as trade war looms
The Bank of Canada is widely expected to cut its benchmark interest rate by a quarter-percentage-point on Wednesday as it weighs competing risks from a potential trade war with the United States.
Analysts and investors are looking for the central bank to lower its policy rate to 3 per cent from 3.25 per cent. That would be the sixth consecutive cut since the bank began easing monetary policy last summer.
The rate decision will be announced at 9:45 a.m. ET followed by a press conference by Governor Tiff Macklem and senior deputy governor Carolyn Rogers at 10:30 am ET.
The rate decision is happening in the shadow of U.S. President Donald Trump’s threat to impose 25-per-cent tariffs on imports from Canada – perhaps as early as Feb. 1.
Tariffs are a complex problem for central banks. They blunt economic growth and raise unemployment, which typically implies lower interest rates. At the same time, countertariffs and a depreciation of the Canadian dollar would increase consumer prices, suggesting tighter monetary policy. Economists call this punishing combination “stagflation.”
“There’s likely to be an inflation impact at the same time that we have a slowdown in the economy, so that puts a central bank in a very complicated space,” Bank of Canada deputy governor Toni Gravelle said in an appearance in Toronto earlier this month.
Analysts expect the bank will focus more on the downside risk tariffs pose to economic growth, investment and jobs than the upside risks to inflation. That would imply another interest rate cut. The bank will publish new analysis on the potential impact of tariffs on Wednesday in its quarterly Monetary Policy Report.
Apart from the tariff threat, there are reasons for the Bank of Canada to pause its monetary-policy-easing campaign. The headline inflation rate was 1.8 per cent in December, below the bank’s 2-per-cent target. However, this was influenced by the one-off impact of the federal government’s GST holiday. Measures of core inflation showed a noticeable reacceleration.
Meanwhile, Canada added a net 91,000 jobs in December, while retail sales, housing market activity and business sentiment have all improved in recent months.
The U.S. Federal Reserve will announce its own interest rate decision Wednesday afternoon at 2 p.m. ET. The Fed is widely expected to hold interest rates steady, following stronger-than-expected U.S. economic data. If that happens, it could put more space between Canadian and U.S. interest rates, adding further downward pressure to the Canadian dollar exchange rate.
“If these were normal times, we would be calling for the bank to stand aside. With the Fed on hold, the Canadian dollar on its heels, core inflation turning back up, and plenty of signs of life in domestic spending, there are reasons to take a pause,” Douglas Porter, chief economist at Bank of Montreal, wrote in a note to clients last week.
“But these are clearly not normal times. With the Canadian economy facing a possible massive shock from U.S. tariffs, the bank should likely be cutting simply from a risk-management perspective.”
Read more here: Bank of Canada set for another rate cut as Trump’s tariff threats loom