Bank of Canada Expected to Maintain Interest Rate Amid Economic Uncertainty
The Bank of Canada is widely anticipated to keep its key overnight interest rate unchanged at 2.25 percent when it announces its next monetary policy decision on Wednesday, January 28. While economists overwhelmingly predict this week's announcement will result in a hold, recent economic data and ongoing trade tensions with the United States have significantly weakened the case for future rate increases, at least until much later in the year.
Economic Data Points to Softer Growth Outlook
Benjamin Reitzes, a Canadian rates and macro strategist at Bank of Montreal, noted in a recent analysis that while conditions haven't changed enough to prompt a shift toward rate cuts at this week's announcement, recent economic indicators suggest potentially slower growth ahead. "The market is now leaning ever so slightly to cuts in the first half of the year," Reitzes wrote, adding that the latest data "reinforced that risks are skewed toward a softer backdrop and further rate cuts."
Reitzes pointed to weaker labor trends and other economic signals that have "quieted" the chatter from late last year about potential rate hikes. While a deeper economic softening isn't his base case, he emphasized that downside growth risks prevail, with uncertainty around trade and tariffs representing key concerns for policymakers.
Central Bank's Cautious Stance
At the Bank of Canada's last rate-setting announcement in December, Governor Tiff Macklem made it clear that it would take a material change in economic conditions to prompt a policy shift. Reitzes noted that Macklem has also suggested slowing inflation could trigger additional stimulus from the central bank in the form of future rate cuts should the economy show signs of sagging.
The economics team at Toronto-Dominion Bank echoed this cautious outlook in their own analysis, stating that there is nothing in the current data likely to make the Bank of Canada shift its policy stance. They noted that the Canadian economy continues to face significant uncertainty despite moderating inflation, writing that "it would take a significant undershooting of economic growth or meaningful softening in the labour market to force policymakers off the sidelines."
Future Rate Trajectory Remains Unclear
A decision on Wednesday to maintain the current rate would mark the second consecutive hold after 100 basis points of cumulative cuts in 2025. However, the consensus that this week's announcement will result in no change doesn't eliminate the possibility of future rate increases entirely.
Derek Holt, head of capital markets economics at Bank of Nova Scotia, predicted in a note published Friday that while he doesn't expect a rate change this week, rates will likely be moving up again by the end of the year. "The Bank of Canada will fire off everything it has by way of communication tools on Wednesday — and do nothing," he wrote, adding that the central bank is nevertheless likely to drop clues about its future direction during the announcement.
The upcoming decision comes amid ongoing uncertainty surrounding trade negotiations, including the renegotiation of the Canada-U.S.-Mexico Agreement, which continues to weigh on economic forecasts and monetary policy considerations.
