After six consecutive rate cuts dating back to last June, the Bank of Canada (BoC) has kept its key policy rate unchanged. Prior to today’s meeting, there was speculation that tariff friction and weak business sentiment might prompt further reductions. However, the central bank has chosen to adopt a wait-and-see approach, maintaining flexibility in response to a dynamic economic environment.
BoC maintains policy rate at 3%
Amid analyst uncertainty regarding a potential rate cut ahead of the meeting, the BoC opted for the status quo. This decision reflects considerable evidence supporting a temporary pause—especially from key readouts in unemployment, gross domestic product (GDP) and inflation.
Notably, the January jobs report showcased a robust Canadian labour market, with 76,000 jobs added and the unemployment rate dropping to 6.6%, surpassing the consensus forecast of 6.8%. While the February job data was underwhelming—1,100 jobs were added versus the 20,000 expected by economists polled by Reuters—the unemployment rate held steady at 6.6%.
Simultaneously, core consumer price index (CPI) rose to 2.1% in January, exceeding the median forecast of 1.7%. While the headline CPI figure matched the consensus forecast of 1.9%, this was tempered by the federal government’s GST/HST holiday which reduced prices on items such as restaurant meals and alcohol purchased in stores. Without this temporary tax break, the headline number would have likely surpassed consensus estimates, as well.
Additionally, preliminary retail sales in December 2024 experienced its most rapid month-over-month growth in two years, rising 1.6% versus a consensus forecast of 0.2%. Final figures released on February 21 were revised upward from 1.6% to 2.5%, marking the sharpest rise in retail turnover since May 2022.
The positive data was reinforced by preliminary gross domestic product (GDP) data which increased by 0.3% in January following a 0.2% expansion in December, suggesting that the economy ended Q4 2024 at a better-than-forecast annualized pace of 2.6%. Subsequent data reported on February 28 confirmed GDP topped expectations in Q4, advancing 2.6% on an annualized basis.
Despite a key confluence of indicators suggesting a potential pause was warranted, secondary considerations added suspense to today’s decision.
For instance, the CFIB Business Barometer and Ivey Purchasing Managers Index readouts were unsettling, with both falling well below consensus estimates. The latter came in at 47.1 versus a consensus of 54.1, marking its lowest reading since December 2020—the depth of the COVID crisis. Both indexes are considered leading economic indicators and infer potential weakness in consumer spending and business investment in the coming months.
In addition to the mixed data, the looming tariff threat has been a clear central bank consideration in recent times. With the Trump administration again postponing broad-based tariffs on Canadian imports in March, the BoC may have felt less compelled to overextend its remaining policy tools at this time. This, despite ongoing trade uncertainty that continues to weigh on the country’s business climate.
Tariff headwind remains biggest ‘X’ factor on the economy
In justifying the January cut to 3.00%, the BoC cited ‘tariffs’ six times in its press release disseminating the news. Specifically, the central bank asserted if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested.
It further added that it would closely monitor developments and evaluate their impact on economic activity, inflation, and monetary policy in Canada.
These same dynamics are at play today, with the BoC again signaling tariffs played a part in their decision making. Although previous rate cuts are having a positive impact, their effectiveness is being dampened by delayed capital investments, particularly in manufacturing. By holding rates steady, the BoC is preserving its policy tools for future use as the tariff threat evolves. In such an instance, any lasting increase in cross-border tariffs could force the policy rate to 1.5% or lower.
| Bank | Q1 2025 (%) | Q4 2025 (%) |
|---|---|---|
| BMO | 3 | 2.5 |
| CIBC | 2.75 | 2.25 |
| National Bank | 2.75 | 2.25 |
| RBC | 2.75 | 2 |
| Scotiabank | 3 | 3 |
| TD Bank | 3 | 2.25 |
* All figures assume no tariffs
At 3.00%, today’s unchanged policy rate remains aligned with three of Canada’s ‘Big Six’ bank consensus forecasts for Q1 2025. With a blended policy rate average of 2.375% projected for the end of 2025, the consensus view is that the BoC is approaching the end of its current rate-cutting cycle. These forecasts assume no implementation of broad-based tariffs—an outcome that remains uncertain.
In the meantime, Skyline is sticking to its baseline assumption that tariff risks are mainly being used to enforce the U.S. administration’s domestic policy agenda. If this assumption holds, we align with Canada’s major banks in anticipating the policy rate will remain at or above 2%, indicating the BoC’s rate-cutting cycle, initiated last June, is approaching its conclusion.
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* As at September 30, 2024
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