Bank of Canada to hold rates at 2.75% but cut at least twice more this year

Reuters

3 days ago

BENGALURU, June 2 (Reuters) - The Bank of Canada will hold interest rates at 2.75% on Wednesday as policymakers await further news on an economy that grew faster than expected last quarter, with at least two more cuts likely this year, according to a majority of economists in a Reuters poll.
That strong consensus around the upcoming decision came after data on Friday showed the economy grew quicker than predicted last quarter, at 2.2%.
The surprising growth was primarily driven by exports as U.S. companies rushed to stockpile Canadian goods before U.S. President Donald Trump's tariffs kick in.
Lower household spending and weak domestic demand, however, suggest a downturn is coming. Also, Trump's recent announcement he would double tariffs on imported steel and aluminum to 50% could further worsen the outlook.
Still, solid economic growth in Q1 and core inflation flirting with the upper end of the BoC's 1-3% target range will provide ample reason for the central bank to hold rates this week for a second straight meeting.
Over 75% of economists, 20 of 26, polled by Reuters said so following the gross domestic product data release. That is in line with interest rate futures pricing.
"There isn't urgency from the growth numbers, and there is caution from the core inflation numbers," said Douglas Porter, chief economist at BMO Capital Markets, who expects the BoC to hold.
"The overall GDP numbers have been surprisingly resilient. While the economy is certainly not as strong as the headline suggests, the reality is (that) it has managed to grind out some modest growth."
Prior to the release, economists were unsure about the decision. Among top Canadian banks, BMO, CIBC and TD shifted their call to a pause from a cut while Scotiabank stood pat on their earlier view of no change.
The BoC has already cut the rate by a cumulative 225 basis points since June 2024.
Although there was no clear consensus on where rates would be by end-2025, nearly 75% of economists - 17 of 23 - said the BoC would cut rates at least twice more this year, including eight forecasting another two reductions, seven saying a further three cuts and two a further four.
"While we would argue a cut would be the right step, odds are the BoC won't deliver one just yet, having signaled that it's less willing to be forward-looking amidst considerable uncertainty over the outlook," said Avery Shenfeld, chief economist at CIBC.
"So we look for a pause (on Wednesday), but one accompanied by a message that leaves the door open for rate relief ahead."
Last month, BoC Governor Tiff Macklem explicitly warned of a possible growth slowdown in coming quarters. But the BoC will refresh its economic outlook in July, which could be another reason to wait this week.
The economy grew 0.1% in April, better than feared, but that is unlikely to be sustained. It will contract 1.0% and 0.5% this quarter and next, respectively, poll medians showed. If realised, that would meet the technical definition of a recession.
"Whatever happens next, the BoC cannot assume the status quo will hold ... We believe Canadian growth is likely to slow sharply through the middle part of the year, justifying further rate cuts," said Andrew Kelvin, head of Canadian and global rates strategy at TD Securities.
(Other stories from the Reuters global economic poll)