Trump's threat of tariffs could cause interest rates to fall further in 2025, economists predict
After five consecutive cuts, many Canadian economists predict the Bank of Canada will continue to cut its key rate next year, to 2% by the summer.
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After five consecutive interest rate cuts in 2024, economists say the Bank of Canada should continue to cut rates in 2025.
But how much? Perhaps it depends on how much you trust Donald J. Trump.
The U.S. president-elect's threat to impose a 25% tariff on all Canadian imports would be a devastating blow to an already struggling Canadian economy if he carries out his threat. And that could encourage the bank to continue its rate-cutting campaign to revive the economy.
"Trade wars are bad for open economies that rely on trade," says Shaun Osborne, currency strategist at Scotiabank. "And we are part of that." »
CONTINUED FROM ARTICLE BELOW
The Bank of Canada's key lending rate has been cut five times in 2024, from 5% to its current level of 3.25%.
The bank raised interest rates ten times between March 2022 and last summer in an attempt to bring inflation back to its 2% target. Inflation peaked at 8.1% in June 2022 when the Canadian economy reopened after COVID restrictions. In November, Canada's annual inflation rate was 1.9%, just below the middle of the bank's 1% to 3% target range.
The theory is that by making borrowing more expensive, consumers and businesses will spend less, which will lower prices and slow the economy.
Now that the economy is slowing and inflation has largely fallen, the bank is taking the opposite approach, trying to boost growth by cutting rates.
The bank has gone through its last two rate cuts, cutting by 50 basis points — half a percentage point — twice in a row.
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