Tariffs exacerbate economic uncertainty, Bank of Canada may hold steady tonight
The market expects the Bank of Canada to keep the overnight rate unchanged at 2.75% due to a lack of clear economic signals. Despite tariffs putting pressure on the economy, core inflation in Canada is rising, and economic performance in the first quarter exceeded expectations. Analysts believe that the Bank of Canada may further cut interest rates in the future, but current policymakers may maintain a dovish tone to address economic uncertainty
According to the Zhitong Finance APP, the Bank of Canada will announce its interest rate decision at 21:45 Beijing time on Wednesday. The market expects the Bank of Canada to maintain the overnight rate at 2.75%, marking the second consecutive pause in rate cuts, as Canadian central bank officials await clearer signals on how U.S. President Donald Trump's trade war will ultimately impact the economy.
Bank of Canada officials may reiterate that they will act swiftly if economic data deteriorates or if they believe they have enough information to understand how the trade dispute will evolve. However, for now, the lack of clear information may force them to remain on hold.
Andrew Kelvin, head of Canadian and global interest rate strategy at TD Securities, stated, "I think the Bank of Canada will find it difficult to determine the development of the global trade situation for the remainder of this year, but the Canadian domestic economy is resilient enough that the Bank of Canada has the capacity to wait until July to act."
Trump's tariffs on various Canadian goods, including steel, aluminum, automobiles, and products not compliant with the North American Free Trade Agreement, have harmed the labor market and weakened confidence among businesses and consumers. However, Canadian core inflation is rising, and the economy performed better than expected in the first quarter, partly because businesses rushed to ship more goods to the U.S. before the tariffs took effect.
The Bank of Canada may not provide much forward guidance, but as the impact of tariffs intensifies, economists and the market expect the bank to further cut rates later this year. Given the potential for future economic damage, the likelihood of policymakers maintaining a dovish tone has increased.
Royal Bank of Canada economists Nathan Janzen and Abbey Xu stated that the Bank of Canada is ahead of other central banks in terms of monetary easing, "If economic conditions weaken, there is still room for further rate cuts."
Most analysts indicate that Canadian Prime Minister Carney's decision to delay the release of the national fiscal status report has exacerbated economic uncertainty. Manulife Investment Management economist Dominique Lapointe noted that, coupled with the rollercoaster changes in U.S. trade policy, "the Bank of Canada may be forced to remain on hold at this meeting and even the next one."
