By Indradip Ghosh
BENGALURU (Reuters) -The Bank of Canada will reduce its overnight interest rate by 25 basis points on October 29 for a second consecutive time to support a weak economy under threat from U.S. tariffs, according to a majority of economists polled by Reuters.
Tariffs imposed by the U.S. on steel, aluminum and automobiles have hurt Canada’s exports, leading to a 1.6% economic contraction in the second quarter. The economy has been partly shielded by the U.S.-Mexico-Canada Agreement (USMCA) which is up for review next year.
U.S. President Donald Trump on Thursday suddenly terminated all trade talks with Canada. Unemployment was already at a record high and firms are pessimistic about investments and hiring.
BoC Governor Tiff Macklem recently said the central bank would place more emphasis on potential risks in its upcoming decision.
The BoC will cut its key rate by a quarter percentage point to 2.25% next week for a second time in a row, according to around 70% of economists – 23 of 34 – surveyed in the October 21-24 Reuters poll. That forecast comes despite a recent surge in inflation.
Eleven expected the central bank to hold, with only BMO among the big five Canadian banks in that group. That included six who expected the next cut to come in December.
The central bank has already delivered 250 basis points of rate cuts, one of the most aggressive in the G10 group of countries.
“The priority at this point is still to provide some economic momentum to help close the slack and bring the unemployment rate down again,” said Avery Shenfeld, chief economist at CIBC Capital Markets.
“For now, our forecast is this is the last rate reduction, but the BoC would likely return with rate cuts in 2026 if trade negotiations are unable to extend the USMCA deal…the biggest risk is we lose the exemption from tariffs we now have under the agreement.”
A more than 60% majority – 21 of 34 – predicted the rate to be 2.25% at the end of next year. That matches the bottom of the central bank’s 2.25%-3.25% estimated neutral rate range, which neither stimulates nor restricts economic activity.
Only eight economists saw the rate at 2.00% or lower by end-2026.
“We expect cutting beyond that (2.25%), into outright stimulative levels of interest rates, will be more difficult with inflation still sticky at an above-target rate and fiscal policy potentially ramping up as a support after the federal budget in early November,” said Abbey Xu, economist at RBC.
The Canadian economy likely rebounded last quarter, growing at an annualised 0.5%, poll medians showed.
It is forecast to expand 0.9% this quarter and average 1.2% growth this year and next, the lowest since the pandemic.
The unemployment rate is expected to remain near the current 7.1% until at least the second half of next year.
Inflation, which rose to 2.4% last month from 1.9% in August, will remain largely contained around the middle of the BoC’s 1%-3% target range over the coming years, the poll showed.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Reshma Ann Samuel; Editing by Ross Finley, William Maclean)
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