The Bank Cut as Expected, but Another Rate Cut in April Isn’t Guaranteed March 12, 2025

While today's rate cut was in line with market expectations, the tone of the press release gave little indication of what to expect in April. As both Desjardins Economic StudiesExternal link. and the Bank of CanadaExternal link. have previously determined, the trade war with the US is likely to have a stagflationary impact on the Canadian economy, characterized by a combination of higher inflation and lower real growth at least temporarily. The Bank will need to balance these impacts along with any increase in Canadians' inflation expectations.

To that end, as the Governing Council concluded at the end of its press release, "Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation. Governing Council will be carefully assessing the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs. The Council will also be closely monitoring inflation expectations. The Bank is committed to maintaining price stability for Canadians."

The market reaction following the announcement suggests investors are acknowledging that a follow-up rate cut in April is no slam dunk. Clearly, the Bank of Canada is mindful of its inflation-fighting credibility, which has been bruised by the pandemic experience and the Bank's tendency to brush off that spike as transitory. Our forecast has embedded a more gradual rate cut profile than would be expected absent the upward pressures on inflation, but clearly the will want to assess the early evidence, both on growth and inflation, before offering more accommodation. Key to watch for market participants will be the Bank's next business and consumer surveys, out on April 7, which should provide another update on how hiring, investment and inflation expectations are evolving.