Economists and markets expect a 25-basis-point rate cut this week, bringing the Bank of Canada’s policy rate to a two-year low of 3%.
This cut, which would be the BoC’s sixth in a row since its policy rate reached a peak of 5%, is already largely priced into the market.
If it happens, the prime rate will drop to 5.20% (and TD’s mortgage prime a smidge higher at 5.35%), offering yet more relief to borrowers with variable-rate mortgages.
Bond markets are currently pricing in about an 83% chance of a quarter-point rate cut this week—coincidentally, not far off the results from CMT’s unofficial BoC rate-cut poll running on LinkedIn.
While this decision is widely expected, future rate cuts are going to become a little more tricky to predict.
The Bank of Canada is likely to adopt a more neutral stance in the coming months, particularly with increasing geopolitical risks and uncertainties around U.S. tariffs. At the same time, the U.S. Federal Reserve is expected to slow the pace of its own rate cuts, which could influence Canada’s future policy direction.
It’s worth noting that Scotiabank is the only major forecaster suggesting the BoC “should pass” on a rate cut this week. However, Derek Holt, VP and Head of Capital Markets at Scotiabank, acknowledges that the central bank “may as well take the easy route in what’s priced in.”
Here’s a look at what some economists and analysts are saying…
On the size of this and future rate cuts:
- TD Economics: “Despite the tax cut driven dip in headline inflation, core inflation pressures have picked up over the past three months, suggesting that inflation readings are likely to move up a bit in the months ahead. This will give the Bank of Canada reason to adopt a more gradual pace of interest rate cuts this year. We expect a quarter point cut at every other decision in 2025.”
- BMO: “We expect the Bank of Canada to next move in March, but we can’t rule out a January action. By September, with the policy rate at 2.50% and having fallen into the bottom half of the estimated neutral range, we expect the Bank to pause indefinitely.”
- Desjardins: “With the inauguration of President Donald Trump…downside risks to the economy abound, not least from the threat of a 25% tariff being introduced on February 1. This economic uncertainty reinforces our call the next rate cut [this week] is likely to be a modest 25 basis points, and that subsequent rate reductions should be of a similar magnitude.”
- CIBC: “Canada’s inflation data is only going to get harder to dissect in January, with the full month impact from the GST/HST tax break taking hold. Any news on the tariff front will also muddy the picture for inflation ahead. However, through the volatility it still appears that core price pressures are low enough, and the economy weak enough, to justify a 25bp reduction in interest rates from the Bank of Canada [this] week.”
On the impact of U.S. tariffs:
- National Bank: “Rates will likely come down further if tariffs are applied, but the more uncertain question is how much they’ll need to fall. Given the high degree of uncertainty, this is a question Governing Council won’t be willing to answer but they may feel comfortable explaining the rate path would be pointed lower in this scenario…What might that look like? While obviously speculative, we can envision a ‘two-tiered’ easing cycle whereby the BoC cuts to around 2% while inflation temporarily spikes and then eases more after it passes, and the economy is left battered.”
- RBC Economics: “Tariffs represent a complicated setup for central banks. They tend to increase costs (inflationary), but they also weaken an economy (deflationary). Most central banks have been clear that they are less likely to respond to inflation directly generated from tariffs, because they increase the price once, and then no longer contribute to year-over-year inflationary pressures. However, the follow on impact of rising inflation driven by a drop in demand could be more damaging. How the Bank of Canada will respond to this environment is not clear, but it has implications for other sectors like housing that could provide an offset from further interest rate cuts.”
Current policy rate & bond yield forecasts from the Big 6 banks
| Current Policy Rate: | Policy Rate: Q1 ’25 |
Policy Rate: Q4 ’25 |
Policy Rate: Q4 ’26 |
5-Year Bond Yield: Q4 ‘25 |
5-Year Bond Yield: Q4 ‘26 |
|
|---|---|---|---|---|---|---|
| BMO | 3.25% | 3.00% | 2.50% | 2.80% | ||
| CIBC | 3.25% | 2.75% | 2.25% | 2.25% | NA | NA |
| National Bank | 3.25% | 2.75% | 2.25% | 2.75% | 2.50% | 2.85% |
| RBC | 3.25% | 2.75% | 2.00% | 2.45% | 2.45% | |
| Scotiabank | 3.25% | 3.00% | 3.00% | 3.00% | 3.50% | 3.50% |
| TD | 3.25% | 3.00% | 2.25% | 2.25% | 2.75% | 2.75% |
Updated: January 27, 2025
This article was written for Canadian Mortgage Trends by:
