Jumbo cuts done and dusted: What economists are saying about the Bank of Canada and interest rates

Economic landscape is shifting as signs emerge that inflation could be on the rise again

The Bank of Canada cut its benchmark lending rate by 50 basis points on Wednesday to 3.25 per cent.

The second jumbo-sized cut in a row brings the central bank’s rate to the top end of its neutral range — where borrowing costs neither stimulate nor impede growth — of 2.25 per cent to 3.25 per cent.

But the economic landscape is shifting under its feet as signs emerge that inflation could be on the rise again, and consumer spending and the housing market show signs of life on lower borrowing costs.

Taking that into account and the uncertainties Donald Trump‘s upcoming second term pose for the Canadian economy, here’s what economists think the Bank of Canada will do in 2025.

Cycle will end at 2.5 per cent: Capital Economics

Canadians shouldn’t expect more jumbo-sized interest rate cuts, Stephen Brown, deputy chief North America economist at Capital Economics Ltd., said in a note.

The Bank of Canada in its official statement said it will be taking a different approach on rate cuts in the new year.

“The accompanying communications were more hawkish than might have been expected, with the (central) bank no longer indicating that further cuts are guaranteed,” Brown said, highlighting the shift in the statement to “we will be evaluating the need for further reductions in the policy rate one decision at a time” from “we expect to reduce the policy rate further” in the Oct. 23 decision.

He thinks policymakers will continue to cut rates, just not as much as previously forecast.

Capital Economics expects three more cuts of 25 basis points in 2025, pointing to a higher terminal rate than in earlier projections.

Brown thinks this rate-cutting cycle will end at 2.5 per cent rather than two per cent, given that the economy is showing some “green shoots” in consumer spending and the housing market, while some inflation pressures have re-emerged.

A pause looms: Desjardins Group

“Canadian central bankers chose to roll the dice with a second consecutive 50-basis-point rate cut,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note.

He had been one of the outliers among economists calling for a 25-basis-point cut instead of the market-favoured 50 basis points.

However, Mendes doesn’t think the central bank’s second jumbo cut is a sign that it is frontloading its rate-cutting campaign and that it will end at a higher level than expected.

He expects another 25-basis-point cut when policymakers meet for the first time in the new year on Jan. 29, which would be the sixth sequential cut undertaken by officials since June 2024.

After that, Canadians should expect a “pause” in the rate-cutting cycle.

“A pause would give officials time to assess how past rate cuts are feeding through after this aggressive pace of easing,” Mendes said.

Desjardins is sticking with its forecast for rates to ultimately fall to two per cent by early 2026 on the expectation that Canadian exports to the United States will be hit with tariffs.

But the cycle of rate cut after rate cut appears to be over in Mendes’ opinion.

“We do expect a number of pauses along the way,” he said.

More cuts needed: David Rosenberg

“The Bank of Canada 100 per cent did the right thing today by cutting its policy rate 50 basis points once again,” David Rosenberg, founder of Rosenberg Research & Associates Inc., said in a note.

He thinks the central bank will and needs to keep cutting and disputes any assessment of its statement on future rate moves as “hawkish.”

Policymakers replaced a line guaranteeing further rate reductions from its statement and said they will be taking each rate meeting “one decision at a time,” making it tough for markets to place bets on where rates are headed.

“But what is more important is the final destination, not the path itself,” Rosenberg said. “Governor (Tiff) Macklem snuck into (his) press conference a remark that, ‘We anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected.‘”

Ultimately, Rosenberg said the message that rates are headed downward still stands.

He said the Bank of Canada issued a “crucial message” by saying the economy is still in “excess supply,” meaning demand is coming up short of output.

He thinks the Bank of Canada rate will come to rest at two per cent, possibly lower.

• Email: gmvsuhanic@postmedia.com

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