The Bank of Canada (BoC) cut its policy rate to 2.25%, in line with market expectations.
The decision was accompanied by an updated forecast, the first since January as “the effects of US trade actions on economic growth and inflation” are “somewhat clearer”. The bank now expects the economy will grow by 1.2% in 2025, 1.1% in 2026 and 1.6% in 2027. These figures are very similar to our forecast.
The Bank expects that inflation will moderate in the coming months and that CPI inflation will “remain near 2% over the projection horizon.” Notably, the emphasis on underlying inflation remains and that it is holding “around 2.5%”.
Looking forward, should the economy and inflation evolve as expected “Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment”. Of course, they leave room to respond should circumstances change.
Key Implications
The outlook shows a gradual uptake of excess capacity and inflation stabilizing, a scenario that would suggest no more easing is required. However, despite the effects of the trade shock being better understood, the outlook is replete with uncertainty – not least because CUSMA negotiations are set to ramp up next year. Stabilization at 2.25% is our base case on where the policy rate will hold, but we acknowledge that risks abound.
The Bank is now at the bottom end of their estimated neutral range, and a pause is reasonable. While trade represents a downside risk to the outlook, the upcoming federal budget could well represent the upside risk. PM Carney is expected to chart out a vision for the economy to offset some of the structural change the Bank is unable to address. The structure and timing of potential outlays could materially affect the medium-term outlook for the economy, and the Bank’s decision making.
