By Max Sato
(MaceNews) – The Bank of Canada is widely expected to trim its policy interest rate – the target for overnight lending rates – by a “more gradual” pace of 25 basis points to 3.0% on Wednesday in a pre-emptive move to help shield the economy from the threat of stiff tariffs on its exports to the United States.
That would follow two consecutive large-size 50-basis point cuts, in December and October, and three 25-basis point cuts since June when the bank began unwinding the effects of its past aggressive tightening. If the bank goes with a 25-basis point cut, it would deliver a total 200 basis points (2.0 percentage points) in credit easing in just seven months.
After Wednesday’s rate decision, the BOC’s rate-setting panel is not scheduled to meet until March, which means if the bank’s policymakers wish to fend off the drag from the Trump tariffs planned for Feb. 1, they will have to act today.
“If these were normal times, we would be calling for the bank to stand aside,” BMO Financial Group Chief Economist Douglas Porter wrote in a report Friday. “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.”
“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,” Porter said. “Even if the tariff threat is hollow – which may indeed be the case – the now deep uncertainty of U.S./Canada trade relations will likely put an icy chill into business capital spending plans, at least for any firm that exports.”
After the bank’s Dec. 11 rate decision, Governor Tiff Macklem stressed that a series of rate cuts that the bank had delivered in six months were “substantial” and that he and other policymakers at the bank would take a “more gradual” approach toward lowering interest rates further.
He also noted that Canada faces “a major new uncertainty” generated by the then U.S. President-elect Donald Trump who had threated to impose a 25% tariff on all goods from Mexico and Canada, and an additional 10% tariff on imports from China, on his first day at the White House on Jan. 20.
Market participants sighed in relief last week as Trump did not impose heavy import duties on the first day of his administration as he had threatened to do last year. He didn’t bring up the issue during his inaugural speech Monday but later said his plan to levy 25% tariffs on Mexico and Canada is likely to go into effect on Feb. 1.
As policymakers at the U.S. Federal Reserve appear to be holding off from lowering interest rates for now while trying to guide inflation further toward the 2% target from just under 3%, the BOC’s Governing Council members are also watching to see whether the increase in consumer prices is being anchored.
Inflation in Canada measured by total CPI eased to 1.8% December from 1.9% in November after accelerating to 2.0% in October from September’s 1.6%, which was the lowest since 1.1% in February 2021. Now it is half of the corresponding rate in Japan but the core readings are still at 2.4% in median and 2.5% in trim, and as Porter points out, the three-month average in the two core measures has perked up to just above 3.5% annualized, above 3.0% in Japan’s core CPI (excluding fresh food).
The deceleration in consumer inflation was clearly caused by Ottawa’s two-month sales tax break on certain goods until mid-February, which led Canadians to pay less for restaurant food, alcoholic beverages purchased at stores as well as toys and games at the end of the year. CPI data will see similar decline in the prices of some goods in January but inflation is likely to pop once the tax holiday is over.
There will be more statistical noise that the BOC will have to see through to read the strength of consumer spending.
Retail sales were flat on the month in November and when vehicle and gasoline sales are excluded, the core reading dropped 1.0% as Black Friday sales made a late start in 2024 and some people stood still until the sales tax break began in mid-December. Statistics Canada’s advance estimate for December points to a 1.6% jump.