The Bank of Canada’s interest rate decision on Wednesday will be a close call between a 25-basis-point cut and a pause, economists say, as U.S. President Donald Trump’s tariffs create confusion and uncertainty for policymakers.
Currency market bets also seem to be torn.
As of Monday morning, markets were predicting a 60 per cent chance that the bank will not cut, and 40 per cent odds that it will lower the policy interest rate by 0.25 percentage points, according to data supplied by the London Stock Exchange Group (LSEG).
That’s a sharp reversal since Trump paused his country-specific “reciprocal” tariffs for 90 days last Wednesday, when LSEG data showed markets were predicting a 66 per cent chance of a cut amid growing fears of a global recession.
“The U.S.-Canada trade war that’s now been going on for the last couple of months is really putting the Bank of Canada in a bind,” said Michael Davenport, senior economist at Oxford Economics, explaining that the bank is trying to find the right balance between controlling tariff-induced inflation and helping the economy recover from slower growth.
“We think the Bank of Canada is going to take much more of a wait-and-see approach here, and would not be too aggressive on either side — not hike rates aggressively, but also not cut aggressively,” said Davenport, who expects the central bank will pause cuts on Wednesday until the end of the year. “There is so much uncertainty, not only about where tariffs will ultimately end up, but the impact of those tariffs on supply and demand in the economy.”
Central bankers reduced the key rate to 2.75 per cent from three per cent in March — its seventh consecutive cut since June — saying U.S. tariff threats are hurting business and consumer confidence, while warning that the bank will remain cautious about future cuts.
Bank of Canada governor Tiff Macklem has repeatedly said that the bank cannot undo the destructive impact of tariffs on the Canadian economy.
Last week, the Bank of Canada’s quarterly Canadian Survey of Consumer Expectations showed 67 per cent of consumers are anticipating a recession — a significant jump from 47 per cent the previous quarter.
Meanwhile, in the bank’s Business Outlook Survey, firms said they are already halting investment and hiring plans until the economic outlook improves.
Unlike Oxford Economics, economists at RBC and TD expect the bank will choose to add more support to the economy.
“Wednesday’s interest rate decision for the Bank of Canada will be another close call for policymakers,” wrote Nathan Janzen and Abbey Xu in a note to clients Friday, “but we expect they will ultimately opt to add another ‘insurance’ 25-basis-point cut in the face of escalating U.S. tariff risks.”
Janzen and Xu cited the latest jobs report, which showed the Canadian economy recorded its biggest job loss in March since January 2022.
And TD forecasts the Bank of Canada will cut the overnight target rate to 2.25 per cent in the second quarter, keeping it at that level for the rest of the year and throughout 2026.
At 8:30 a.m. on Tuesday, Statistics Canada is set to release March inflation numbers. The data will largely be influenced by the end of the GST/HST tax holiday in mid-February, according to economists.
It will also reflect some impact of Canada’s retaliatory tariffs, which came into effect early March, though Davenport expects it to be small.
“I don’t know how much that’s going to affect (the bank’s) decision — if at all,” he said.
The Bank of Canada will release its interest rate announcement and quarterly monetary policy report, which highlights the bank’s projection for inflation and growth, on Wednesday at 9:45 a.m., followed by a press conference with Macklem and senior deputy governor Carolyn Rogers.
