Will the Bank of Canada Cut Rates in March 2025? A Nation Holds Its Breath

In a few hours, the Bank of Canada will announce its policy decision, whether it’s trimming its key policy rate or not! 

Well, Canada currently stands at a crossroads. With 200 basis points already slashed, borrowing costs have eased, yet the economy teeters between resilience and vulnerability. Will the BoC opt for another cut on March 12 or hit pause? The answer lies in a tangled web of cooling inflation, a trade war with the U.S., and whispers from the central bank’s inner circle. Let’s unpack the story shaping this pivotal decision.

The Economic Pulse: A Mixed Beat

Imagine Canada’s economy as a patient being examined by the BoC. The vital signs appear stable yet inconsistent, and Governor Tiff Macklem’s team is analysing the data.

Firstly, there’s inflation—the BoC’s guiding star, set at 2%. The Consumer Price Index (CPI)—which gauges the cost of everyday goods and services—rose by 1.9% over the past year, up from 1.8% in December and aligning with analysts’ forecasts. Monthly prices increased 0.1%, reversing a 0.4% decrease recorded in December. At the same time, the Bank of Canada’s Core CPI—excluding volatile items such as food and energy—demonstrated stronger performance. It increased to 2.1% year-over-year in January 2025 (up from 1.8% the previous month) while experiencing a 0.4% monthly gain that countered December’s 0.3% decline. Since mid-2024, it has hovered around this target, with the Consumer Price Index (CPI) remaining close despite a minor dip from the ending GST/HST holiday. Shelter costs, previously a significant concern, are easing, while core inflation—a measure of underlying pressures—holds steady at a manageable 2%. It’s a Goldilocks situation: neither too hot nor too cold. This stability provides the BoC with some breathing space, though it doesn’t necessitate drastic rate cuts.

Next is economic growth. The economy surged in Q4 2024, showing a 2.6% annualised increase, exceeding expectations and indicating strength. However, the overall picture becomes less clear when viewed from a broader perspective. Per-capita GDP has declined for six consecutive quarters, primarily due to population growth outpacing economic output. The BoC’s January 2025 forecast reduced the growth projection for 2025 from 2.1% to 1.8%, attributing this to tighter immigration limits and trade concerns. With surplus supply still present, the economy isn’t overextended, leaving room for potential boosts from lowered rates. The Canadian economy expanded by 2.6% compared to the same quarter of 2023, surprisingly faster than the 2.2% growth recorded in the third quarter of the previous year, which was upwardly revised from 1%. Market participants had anticipated a slower pace of expansion at 1.9%. In December, the Canadian economy grew by 0.2%, matching the rate at which it declined in November. Economists had forecast a higher growth rate of 0.3%.

On the other hand, the labour market reveals a different story. February’s jobs report recorded a mere 1,100 new positions, a stark contrast to December’s 91,000-job surge. The unemployment rate remains at 6.6%, but job creation is lagging behind the expanding labor force, creating softer conditions. Wages, which previously drove inflation, are beginning to cool. This sluggish job market could push the BoC towards easing measures for Canadians in search of work.

At the same time, households are beginning to respond. Interest rate cuts since June have eased the burden for those with variable-rate mortgages, encouraging spending and revitalising housing markets. However, those with fixed-rate mortgages, linked to high bond yields, continue to experience difficulties. The recovery is uneven—sufficient to please the BoC but not enough to solidify the situation.

The Trade War Wildcard

Enter the elephant in the room: a bruising trade spat with the United States. On March 4, 2025, President Donald Trump slapped tariffs on Canadian exports, igniting a firestorm just days before the BoC’s decision. Though the measures have flickered—pauses and tweaks abound—the threat looms large. Canada, where exports fuel a third of the GDP, could see growth gutted and inflation stoked as the loonie weakens and import costs climb.

Governor Macklem didn’t mince words. On February 21, he warned that prolonged tariffs could “wipe out growth” for two years, plunging Canada into a structural slump. The BoC’s January playbook modeled a 25% tariff hit: GDP down 2.5% in year one, 1.5% in year two, with inflation spiking briefly. Monetary policy can’t undo the damage, Macklem said, but it can “smooth the ride.” This dual-edged sword—growth at risk, prices creeping up—casts a shadow over March 12.

Recently, China announced tariffs on certain Canadian agricultural goods, retaliating against the levies Canada introduced in October and opening a new front in a trade war largely driven by US President Donald Trump’s tariff threats. Beijing stated that a 100% tariff would be imposed on Canadian rapeseed oil, oil cakes, and peas, while a 25% levy would be placed on aquatic products and pork originating from Canada. The commerce ministry announced the tariffs, which are scheduled to take effect on 20 March. While Canada is already in a tariff battle with the US, China’s imposition could significantly affect business activity within the country. 

Yesterday, President Donald Trump announced on social media that he is implementing an additional 25% tariff, raising it to 50% on aluminum and steel imports from Canada to the U.S. He stated that this would take effect on the morning of March 12. However, just hours after announcing a 50% double tariff on Canadian steel and aluminum on social media, US President Donald Trump has yielded to market and cabinet pressures. He floated the idea of reconsidering his double-tariff plan shortly after expressing his intent to impose these tariffs on his Truth Social account.

Voices from the Top- How BoC Leadership Navigates Uncertainty Amid Trade Tensions

Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers, and other members of the Bank of Canada’s (BoC) leadership have signalled a cautious yet flexible approach in response to rising economic uncertainties.

In his February speech, Macklem highlighted the risks posed by potential trade conflicts, particularly those triggered by U.S. tariffs, warning that such disputes could severely disrupt Canada’s economy, potentially erasing growth for two years. The BoC’s January Monetary Policy Report outlined the economic impact of a 25% tariff scenario, projecting a 2.5% drop in GDP in the first year, followed by a 1.5% decline in the second year, alongside a brief inflation spike. Despite these concerns, Macklem also pointed to the positive effects of lower interest rates, which have been boosting household spending and economic activity. His statement, “Monetary policy can’t offset the full impact of a trade conflict, but it can help smooth the ride,” has gained further relevance amid escalating tariff threats from both the U.S. and China.

Senior Deputy Governor Carolyn Rogers, speaking at a press conference, provided a measured outlook. She noted that excess supply in the economy is gradually being absorbed, with a balance expected by 2026. While acknowledging that lower interest rates support spending, she emphasised the need to monitor economic indicators closely. With weak job growth reported in February and tariffs continuing to weigh on the economy, Rogers’ focus on data-driven flexibility suggests that a rate cut could be on the table.

Deputy Governor Sharon Kozicki reiterated the BoC’s focus on ensuring price stability while navigating economic uncertainty. Similarly, Deputy Governor Toni Gravelle, known for his emphasis on financial system resilience, is expected to support measures to stabilise markets, particularly given the ongoing tariff turmoil.

Macklem reinforced the BoC’s readiness to adjust its stance in trade conflicts, stating, “The potential for a trade conflict… is clouding the outlook. We’re prepared to adjust.” With China’s 100% tariff on Canadian rapeseed oil and the continuing volatility around U.S. tariff policies, the BoC is positioning itself to act. A 25-basis-point rate cut is likely unless new fiscal or trade developments alter the outlook.

The Bigger Picture

Beyond the BoC’s walls, other forces tug the strings. Ottawa’s poised to counter tariffs with fiscal aid—think sector-specific relief outpacing the slow grind of rate cuts. If that ramps up by March 12, the BoC might ease off the gas. Globally, the U.S. Federal Reserve’s steady 4.25–4.5% rate limits how far Canada can diverge without tanking the dollar. Markets, too, are leaning in—post-jobs data, they peg an 80% chance of a 25-basis-point cut, eyeing 2.5% by year-end.

The Verdict: Cut or Hold?

So, will the BoC cut to 2.75% tomorrow? The tea leaves point to yes—but it’s no slam dunk. A 25-basis-point trim aligns with a cooling labour market, tariff threats, and Macklem’s smoothing instinct.

Yet there’s a case to hold. Q4’s GDP pop and stable inflation suggest resilience, and tariff fallout might not hit full force by March 12. A pause could steady the loonie and buy time to assess fiscal moves. Still, the BoC’s recent tempo—six cuts in nine months—tilts the odds toward action.

What It Means for Canada

If the rate dips to 2.75%, borrowing gets cheaper, a boon for homeowners and businesses. It’s a step closer to the neutral range (2.25–3.25%), where policy neither brakes nor boosts. A hold, though, signals faith in current momentum, betting on fiscal help to blunt the tariff edge. Either way, Canadians—from Bay Street to Main Street—will feel the ripples.

The Final Word

As the clock ticks to March 12, the BoC faces a high-stakes call. Inflation’s tamed, growth’s flickering, and a trade war’s brewing. Macklem’s crew has the tools and the will to act, likely delivering a modest cut to steady the ship. But in this unpredictable saga, one thing’s clear: Canada’s economic story is far from written. Today, we’ll turn the page.