Trade Tensions, Inflation, and the Path of Rate Cuts

Amid the economic tug-of-war between inflation and weakening growth due to the ongoing U.S. trade war, the Bank of Canada (BoC) is navigating the challenge of managing both inflation and economic expansion.

As of April 16, 2025, the BoC has responded to current inflationary pressures by pausing rate hikes, maintaining its interest rate at 2.75%. However, with escalating trade tensions with the U.S., a resumption of the easing cycle is expected at the BoC's next announcement on June 4. According to economist Benjamin Shenfeld, a 50-basis-point cut is possible, but a more likely scenario is a 25-basis-point reduction in both June and July.

Desjardins economist Royce Mendes also anticipates the possibility of a larger cut in June. He suggests that by then, "hard economic data will have deteriorated", and a deceleration in inflation could provide the BoC with the flexibility for a more substantial adjustment.

Since June 2024, Canada's central bank has reduced its policy rate by a total of 2.25

percentage points over seven consecutive decisions. Looking further ahead, economists' projections diverge. Mendes expects the overnight rate to reach 1.75% by year-end, a further drop of 1 full percentage point. In contrast, TD Economics forecasts a more modest 50-basis-point reduction for 2025. BMO’s Doug Porter anticipates that economic pressures will eventually push rates "slightly below neutral," with the BoC's current neutral range estimated between 2.25% and 3.25%.