Bank of Canada's Dovish Tone Could Offer Borrowing Relief Without Rate Cuts
As the Bank of Canada prepares for its interest rate decision on Wednesday, economists are anticipating a hold on the key rate at 2.25 per cent. However, Canadian borrowers seeking relief might still find hope through alternative measures, according to financial experts.
Economic Concerns Outweigh Inflation Risks
Royce Mendes, head of macro strategy at Desjardins Group, argues that with storm clouds gathering on the economic horizon, the central bank should prioritize growth over theoretical inflation risks. Despite headline inflation exceeding expectations in December, core measures have decelerated, with underlying inflation now hovering just above 2 per cent.
From a strictly data-driven perspective, there is little reason for the Bank of Canada to sound hawkish on inflation, Mendes stated. The focus should shift to mounting economic vulnerabilities.
Signs of Economic Slowdown and Fragile Confidence
Recent indicators reveal troubling trends across multiple sectors:
- Business confidence remains weak, as evidenced by the Bank of Canada's own Business Outlook Survey
- Housing markets continue to soften nationwide, with buyer confidence described as fragile
- Fewer than 15 per cent of renters plan to purchase homes in the coming year—the lowest level since 2020
Mendes emphasized that uncertainty surrounding the upcoming CUSMA review has created a vicious cycle where households grow increasingly concerned about job security, further dampening economic activity.
Trade Uncertainty Complicates Monetary Policy
The Canada-United-States-Mexico Agreement negotiations loom large over economic prospects. Recent tensions escalated when former U.S. President Donald Trump threatened Canada with 100 per cent tariffs if Ottawa pursued trade deals with China—a reaction partly attributed to Prime Minister Mark Carney's Davos speech advocating for middle powers to challenge global superpowers.
National Bank of Canada economists noted that while the CUSMA review might not receive explicit mention in the Bank of Canada's rate statement, this is weighing on them significantly. They added that expected rate hikes later this year would become difficult if not impossible should Canada's already tenuous trade relationship with the U.S. deteriorate further.
Market Anticipates Policy Signals Beyond Rate Decision
With no rate change expected Wednesday, financial markets will scrutinize the Bank of Canada's statement and monetary policy report for clues about future direction. Since the central bank first paused rates in December, market expectations have oscillated between further cuts and potential hikes, reflecting ongoing uncertainty.
Mendes pointed to potential tailwinds including federal fiscal stimulus and population growth acceleration, though these factors aren't likely to boost economic activity until late 2026 or 2027. The risk in the near term is that the economy hits an air pocket, he warned, suggesting that a dovish tone from the central bank could provide crucial support to borrowers and businesses without immediate rate adjustments.
