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Essentials of Monetary Policy

The Bank Cut as Expected, but Another Rate Cut in April Isn’t Guaranteed

March 12, 2025
Randall Bartlett
Deputy Chief Economist

Bank of Canada (BoC)

  • In line with the widely held view of economists and markets, the Bank of Canada (BoC) cut the overnight policy rate by 25 basis points to 2.75% today. This is the seventh consecutive rate cut since June of last year, after the overnight rate reached a peak of 5.00% in July 2023. The new level represents the midpoint of the institution’s estimated neutral rate range, meaning it’s neither stimulative nor restrictive.
  • In the press release External link., Governing Council recognized the solid performance of the Canadian economy at the end of 2024, besting the Bank’s expectations (graph 1). Solid domestic demand underpinned by past rate cuts played an important role. “However, economic growth in the first quarter of 2025 will likely slow as the intensifying trade conflict weighs on sentiment and activity. Recent surveys suggest a sharp drop in consumer confidence and a slowdown in business spending as companies postpone or cancel investments.” While surging exports ahead of tariffs will provide an offset to weaker domestic demand in Q1, the BoC doesn’t expect it to last. The Bank also chalked up the softening labour market in February to the uncertainty caused by the trade tensions.
  • In contrast to weakening economic indicators, the Bank’s preferred measures of core inflation all topped 2% at last reading. Inflation would be above the 1.9% print in January as well if it weren’t for the GST/HST holiday, and should increase to about 2.5% at the end of the tax break, per the Bank’s estimate. Our analysis suggests the same (graph 2). 
  • Bank of Canada Governor Tiff Macklem in his press conference opening statement External link., made clear what many Canadians already know—that the impacts of uncertainty and tariffs on inflation are difficult to assess. However, in trying to understand the implications of uncertainty related to trade tensions, the Bank published new survey data External link. on what they’re hearing from businesses and households. According to Governor Macklem, “While it is too early to see much impact of new tariffs on economic activity, our surveys suggest that threats of new tariffs and uncertainty about the Canada-US trade relationship are already having a big impact on business and consumer intentions… Canadians are more worried about their job security and financial health as a result of the trade tensions, and they intend to spend more cautiously… Businesses have lowered their sales outlooks, notably in manufacturing and in sectors that depend on discretionary spending by households… Our surveys also suggest business intentions to raise prices have increased as they cope with higher costs related to both uncertainty and tariffs. At the same time, inflation expectations have moved up as Canadians brace for the possibility of higher prices.”

Implications

While today’s rate cut was in line with market expectations, the tone of the press release gave little indication of what to expect in April. As both Desjardins Economic Studies External link. and the Bank of Canada External link. have previously determined, the trade war with the US is likely to have a stagflationary impact on the Canadian economy, characterized by a combination of higher inflation and lower real GDP growth at least temporarily. The Bank will need to balance these impacts along with any increase in Canadians’ inflation expectations.

 

To that end, as the Governing Council concluded at the end of its press release, “Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation. Governing Council will be carefully assessing the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs. The Council will also be closely monitoring inflation expectations. The Bank is committed to maintaining price stability for Canadians.”

 

The market reaction following the announcement suggests investors are acknowledging that a follow-up rate cut in April is no slam dunk. Clearly, the Bank of Canada is mindful of its inflation-fighting credibility, which has been bruised by the pandemic experience and the Bank’s tendency to brush off that spike as transitory. Our forecast has embedded a more gradual rate cut profile than would be expected absent the upward pressures on inflation, but clearly the BoC will want to assess the early evidence, both on growth and inflation, before offering more accommodation. Key to watch for market participants will be the Bank’s next business and consumer surveys, out on April 7, which should provide another update on how hiring, investment and inflation expectations are evolving.  

2025 Schedule of Central Bank Meetings

NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively.
IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.