Don't expect the Bank of Canada to keep rate cuts on ice for the rest of 2025

The Bank of Canada tapped the brakes on a run of seven straight interest rate cuts in yesterday’s decision – but further reductions are by no means off the table for 2025 as global economic chaos triggered by US president Donald Trump’s tariff wave continues.

The central bank elected to keep its benchmark rate unchanged at 2.75%, citing heightened inflation expectations and uncertainty over the global trade outlook amid US tariffs as key reasons for holding rates steady.

But with Trump showing little sign of scrapping his signature policy – which includes steep levies on Canadian steel, aluminum, and automakers – the Bank could begin cutting again as soon as its next announcement, according to Bank of Montreal (BMO) chief economist Doug Porter.

He told Canadian Mortgage Professional the central bank would have a better idea of how Trump’s tariff war is impacting the Canadian economy by the time that decision, scheduled for June 4, comes around.

“I think the Bank has pretty much told us that they’re going to be responding now to events, not trying to guess where the economy is going – just because there’s so much uncertainty,” he said. “It’s dependent on what happens to inflation, growth, sentiment, employment, in the next six weeks or so.

“There’s always a little bit of volatility in the economic data, even in normal times. But essentially in the next three to four months, I think the Bank will have a much better sense on where the trade war is headed and what it’s actually doing to the economy.”

Inflation still squarely in BoC’s sights as trade war continues

BMO still expects the central bank to cut three more times before the end of the year, bringing its benchmark rate down to 2%. But Porter said it will be in no rush to lower rates – and that a potential inflation uptick caused by the trade war will be its main concern as it maps out the path ahead.

The good news is that while core inflation remains higher than where it was before the federal government’s winter GST holiday, the overall consumer price index (CPI) slid unexpectedly in March, and is expected to dive further in the coming months.

“What’s happened in the last month is that we’ve had the carbon tax removed. Global oil prices have tumbled. We’ve had a dramatic decline in gasoline prices in many areas of the country. We’re going to see a big drop in inflation in the next two months as a result of that – at least the headline inflation number,” Porter said.

“Usually, that’s not a big deal for the Bank of Canada. They would normally look through that. But I think for the average Canadian, that’s a pretty important signal that inflation isn’t that big of a deal… and I think ultimately, the combination of the better-than-expected inflation number, and the fact that we know energy prices have really dropped hard, does set up for rate cuts.”

Loonie’s recovery keeps door open for more 2025 rate reductions

While the loonie plunged as Trump slapped tariffs on imports from Canada in the opening months of this year, it’s recovered in recent weeks – and that growing strength is another reason, according to Porter, that the Bank might feel comfortable cutting rates further between now and the end of the year.

While one of the central bank’s inflation concerns was dealing with a weaker Canadian dollar and rising import prices, “now, we’re potentially looking at the opposite,” he said. “So that actually does make it more likely that the Bank of Canada will be cutting interest rates.”

For now, though, the Bank is clearly determined not to get “pinned down” by committing to premature rate cuts. Still, Porter said the Federal Reserve’s likely course of action on rates this year also lessens the chance that its path will diverge from Canada’s central bank and weaken the loonie further.

“Our view for the Fed is that they’re going to cut three times in the second half of the year,” he said. “So it’s not that different from what we see for the Bank of Canada from here on out.”

Source CMP
By Fergal McAlinden