The Bank of Canada has adopted a cautious approach as it assesses the impact of U.S. tariffs on its economy. Following a quarter-point interest rate cut in March, the central bank maintained its benchmark rate at 2.75% during both April and June. Recent job figures indicated unexpected growth, while core inflation remained around 3%. Consequently, many economists anticipate that the central bank will continue this steady policy at its upcoming July 30 meeting. Interest rate cuts generally aim to stimulate the economy by encouraging spending; however, the Bank is wary about raising rates too quickly should inflation begin to rise.
Some economists, like Frances Donald from RBC, advocate for a more cautious stance, suggesting that the central bank may not need further rate cuts despite signs of weakness in sectors affected by tariffs. She argues that the broad application of interest rate policy does not address the fact that regions like Windsor, Ontario, which faces high unemployment, might not benefit similarly to areas like Victoria, British Columbia, with significantly lower unemployment rates. This calls for targeted fiscal policy intervention instead of the blanket monetary policy of interest rate cuts.
The Bank of Canada has already executed a total of 2.25 percentage points in interest rate cuts over the past year. Meanwhile, Donald believes that this support is only beginning to positively influence the economy. She posits that with current data showing resilient consumer spending and an expected boost in business confidence, the Bank can afford to shift some responsibility for economic support to the federal government. Others, like Oxford Economics, argue the Canadian economy may already be in a recession, predicting a challenging year ahead and no new cuts from the Bank.
Despite differing views, there is consensus that the Bank must remain vigilant regarding inflation, especially given the recent surge in prices. Inflation concerns could lead the Bank to hold rates steady even if economic growth remains sluggish. Donald notes that Canadians are still recovering from an affordability crisis, and the Bank’s focus will likely aim to avoid further inflation pressures in light of consumers’ sensitive experiences over the past years.
BMO’s chief economist, Doug Porter, suggests that while expectations for further rate cuts persist, leading financial markets heeds caution. He highlights upcoming federal government spending, particularly on defense and infrastructure, which could alleviate pressure on the Bank to pursue rate cuts aggressively. Conversely, Capital Economics’ Stephen Brown maintains that the economic climate still warrants further cuts given persistent high unemployment and underutilized economic output.
In this context, the Bank of Canada finds itself positioned at the midpoint of its so-called “neutral range” for interest rates, allowing flexibility to adjust rates depending on economic indicators. Donald envisions this flexibility as a strategic asset, enabling the Bank to respond appropriately to emerging economic shocks in either direction while maintaining its current stance until clearer data emerges. Overall, the central bank’s strategy reflects a balancing act between stimulating growth and restraining inflation pressures, pivotal for navigating a tumultuous economic landscape.
