Bank of Canada officials will be juggling a wide array of macroeconomic indicators as they gather to make their next decision on interest rates on April 16. Given the high uncertainty around tariffs, and with the full effects of previous rate cuts still to materialize, analysts say the central bank may stand pat and await greater clarity.
Policymakers have a tricky job, as a slowing domestic economy, the recessionary forces of Trump’s tariffs, and heating inflation add wrinkles to an already-complex calculation. Investors looking for clarity may have to wait a little longer. Analysts cite how a 33% market-implied probability signals that the Bank is likely to remain in a holding pattern, with the domestic economy still in a state of flux.
“I think the Bank of Canada likely leaves policy rates unchanged on Wednesday,” says Desjardins macro strategist Tiago Figueiredo. “With uncertainty around US trade policy greater than ever, Canadian central bankers will want to wait for more clarity before delivering additional rate cuts.”
The central bank has already enacted a large amount of monetary easing since last summer, including two quarter-point cuts this year, bringing the rate down from 5.00% to 2.75%.
Prior Rate Cuts Still to be Felt
Those cuts are still working their way through the economy. “While the Bank of Canada typically offers a point forecast, the unpredictable nature of the risks facing the Canadian economy may push policymakers to provide a range of possible outcomes instead,” Figueiredo notes. What central bankers need most is clarity on the nature of the incoming inflation shock. He says that will take time to assess, which means the central bank ”moves more quickly later in the year.”
TD economist Admir Kolaj says he’d like to see the Bank trim the policy rate by another 25 basis points as a precautionary measure, but he concedes that “taking a pause is still a potential option.”
Markets were pricing in a 40% chance of a rate cut up until last week. The global market saw a significant selloff, triggered by a flare-up in the US-China trade spat and the prospect of a European retaliation against steep tariffs from the United States. With markets having somewhat settled down, the odds of a rate cut have shrunk to 33%. “This likely reflects the fact that the overall economic health of Canada is in otherwise decent standing as the economy entered the year with significant momentum,” says Kolaj. “Balancing the opposing forces of inflation and growth will keep the Bank of Canada on its toes in the coming months.”
Watching the Forward Guidance on Interest Rates
David Doyle, head of economics at Macquarie, says the Overnight Index Swap market is pricing in 47 basis points in cuts over the next 12 months. “This is helping to keep the Government of Canada bond yields contained,” he notes. The two-year yield currently sits at about 2.6%, and the five-year yield is at 2.78%.
“Those relatively low yields suggest that while the market is not expecting substantial near-term rate cuts, it also isn’t indicating that the Bank of Canada will pivot suddenly to a renewed hiking cycle,” says Doyle. Notably, bond yields reversed their downward trajectory past week, as a sharp bond market selloff sent yields soaring across the curve.
Doyle says apart from any actual rate cuts, investors should watch for any signs of how the “Bank of Canada’s forward guidance and reaction function is shifting amidst the ongoing trade war.” Of particular interest would be whether policymakers place more emphasis on “the growth or inflation impacts from tariffs.” While he expects the Bank of Canada to cut rates by a quarter-point on Wednesday, he admits that “this meeting is a closer call than what we’ve seen over the past several months in that regard.”
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