The Bank of Canada’s Interest Rate Dilemma
The Bank of Canada is facing a tough decision regarding interest rates. Most economists believe that the bank will cut interest rates at least once or twice in the coming months to help boost the economy, which is struggling due to the trade war. However, some experts argue that lower rates may not be the best solution.
The Argument for No More Rate Cuts
RBC’s chief economist, Frances Donald, is among those who think that the Bank of Canada should not cut interest rates further. She notes that while there are pockets of weakness in the economy, such as a soft housing market and a slowdown in manufacturing, the policy rate is a broad tool that affects every Canadian, regardless of their need for support. This means that areas with high unemployment rates, like Windsor, Ontario, would receive the same stimulus as areas with low unemployment rates, like Victoria, British Columbia.
The Need for Fiscal Policy Support
Donald argues that instead of relying on interest rate cuts, the government should provide fiscal policy support to areas that need it most. The Bank of Canada has already cut interest rates by 2.25 percentage points over the past year, and this support is only starting to filter into the economy. She believes that the central bank can now hand over the responsibility to the federal government to provide further support.
Different Forecasts, Different Opinions
Not all experts agree with RBC’s forecast. Oxford Economics, for example, expects Canada to be in a recession that will persist through the rest of the year, but they also believe that the Bank of Canada will not cut interest rates further. They argue that the central bank will want to keep inflation in check, which is expected to rise to three percent by mid-2026 due to tariffs and supply-chain strain.
The Role of Inflation
Inflation is a major concern for the Bank of Canada. After surging over the pandemic, consumers are likely to be "scarred" by new price pressures. Donald notes that the Bank of Canada will likely want to prevent a second round of inflation and will therefore keep its policy rate on hold.
Conclusion
The Bank of Canada’s decision on interest rates is a complex one, with different experts having different opinions. While some believe that further rate cuts are necessary to boost the economy, others argue that the central bank should hold off and allow the government to provide fiscal policy support. Ultimately, the Bank of Canada must weigh the pros and cons of each option and make a decision that will have a significant impact on the Canadian economy. With the policy rate currently at 2.75 percent, the middle of its neutral range, the central bank has the flexibility to pivot lower or keep rates elevated, depending on the data. One thing is certain: the Bank of Canada’s decision will be closely watched by Canadians and will have far-reaching consequences for the economy.
