On March 12, the Bank of Canada (BoC) met for a second time in 2025 to set its key policy rate. Following six consecutive rate cuts since last June, including the latest on January 29, the key question was whether the BoC would continue easing amid strong economic data and rising core inflation. We now have our answer—and one concern may have trumped all others.
BoC lowers policy rate to 2.75%
Amid analyst uncertainty regarding a potential rate cut ahead of the meeting, the BoC opted for yet another reduction. This decision was made despite substantial evidence suggesting that a temporary pause might be justified.
Notably, a standout 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.
Despite key data suggesting a pause may have been justified, secondary considerations provided the BoC with further justification to cut.
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.
Furthermore, the continued threat of tariff continues to weigh on the country’s business climate. Although a worst-case scenario involving a 25% tariff on most Canadian exports may have been avoided in March, the threat is ongoing and continues to dampen the positive impact of previous BoC rate cuts on consumer and business spending.
Given these ongoing concerns, the BoC appears to have taken a proactive stance to stay ahead of the curve on rate cuts.
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 that tariffs played a big part in its decision. While rate cuts are exerting positive effects, their full impact is being undermined by the risk of delayed capital investments, especially in the manufacturing sector. By reducing its policy rate today, the BoC is proactively addressing this looming threat, aiming to stimulate economic growth by influencing lending rates 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 2.75%, the new policy rate aligns with the forecasts of three of Canada’s ‘Big Six’ banks 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 conclusion of its current rate-cutting cycle. These forecasts assume no implementation of broad-based tariffs—an outcome that remains uncertain. In such an instance, any significant increase in cross-border tariffs could force the policy rate to 1.5% or lower.
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 end.
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* As at September 30, 2024
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