Economists and commercial real estate analysts expect the Bank of Canada (BoC) to deliver another interest rate cut as the country’s economy braces for the impact of U.S. President Donald Trump’s threatened 25% tariffs.

“This creates a very challenging backdrop for Canada’s economy, and we expect the BoC to cut rates a quarter point next week, which would put interest rates further into neutral territory – a stance we think is warranted given relatively soft demand backdrop for Canada’s economy,” wrote Leslie Preston, a TD Economics managing director and senior economist in a research note provided to Connect.

Preston and other financial and real estate experts anticipate a 25-basis-point cut after two oversized 50-bps reductions. Another cut would lower the BoC’s key overnight lending rate to 3.25%.

According to Preston, the expectation of the tariff and the establishment of a U.S. External Revenue Agency to enforce tariffs, could dampen trade and economic activity between Canada and its southern neighbour.

“I think we will see a cut,” Ray Wong, an Altus Group vice-president told Connect in an interview. “I think we will see a few more cuts in the year. So I think that’s the overall direction.

“If you look at some numbers that come out with respect to inflation, inflation and the employment rate, that’s heading into a positive direction. I’m not sure if that’s enough for the the Bank of Canada to just leave [the prime rate] unchanged.”

According to the Toronto Star, the market is pricing in an 83% chance of a 25-bps cut at the BoC’s next meeting.

The forecast is supported by the central bank’s cautious message in December, when Governor Tiff Macklem suggested it would slow the pace of cuts going forward after reducing the key rate by 50 basis points (bps) twice in a row. At the time, Macklem said that the proposed tariffs — which could land as soon as Feb. 1 — were a “major new source of uncertainty” for prices in the new year.

Economists point to slowing economic growth and easing inflation as key factors supporting a rate reduction.

“We believe that the heavy overhang of trade uncertainty — possible U.S. tariffs — overrides almost all else,” said Bank of Montreal chief economist Douglas Porter, in a client note, according to Postmedia.

The BoC made its first cut in June 2024, lowering the key interest rate to 4.75 from 5% following a prolonged period of hikes and holds.

Some economists argue that Trump’s tariffs could force the central bank’s hand.

“Were it not for the threat of U.S. tariffs hanging over the economy, it would be easy for the Bank of Canada to justify a pause at its meeting next week,” wrote said Stephen Brown, an economist at Capital Economics, the Star reported. “Nonetheless, it still seems likely that the bank will cut by 25 basis points again next week.”

The potential tariffs will likely have uneven impacts on individual Canadian provinces depending on their size, duration, and industry coverage, according to BMO Capital Markets research. Ontario is among the provinces most exposed to the tariff threat.

A potential inflation increase is complicating the BoC’s decision, according to Preston. Inflation fell to 1.8% in December; however, core inflation, which includes adjustments for tax changes and other volatility, have risen on average over the past three months. That suggests inflation readings may move up in the months ahead, TD’s Preston wrote .

TD’s economists expect the central bank to cut interest rates by a quarter percentage point at every other decision in 2025, starting next week.

Andrew DiCapua, economist at the Canadian Chamber of Commerce, told the Star that the BoC is in a difficult position.

“The potential for new tariffs and retaliatory actions will reverse progress on inflation and growth — a tough situation for any central bank.”

DiCapua said that a pause in rate cuts was possible but not likely, as rates are constraining the economy.

“The Bank has shown its willingness to move aggressively, like cutting rates by 50 [bps]. So, if they do hold off in January, they might have to move in a big way at following meetings depending on how things develop,” he told the Star.

Pictured: Bank of Canada Governor Tiff Macklem

Photo: Bank of Canada