A decision affecting the expectations of the Federal Reserve's interest rate cut has arrived! Will the Bank of Canada stand still or continue to cut interest rates?

The Zhitong Finance App learned that most economists predict that the Bank of Canada may keep the benchmark policy interest rate unchanged on Wednesday local time instead of continuing the interest rate cut process since last year, mainly because the central bank's officials may need enough time to assess the negative impact of the new round of global trade war initiated by the Trump administration on the Canadian economy.

For traders in the interest rate futures market and the US bond market, the Bank of Canada's monetary policy decision to be announced on Wednesday, especially the central bank's outlook on Canadian interest rates and economic prospects under the impact of tariffs, is critical for them to set expectations for the Fed to cut interest rates. Traders in the current market are betting that the Federal Reserve will cut interest rates three times in 2025. The first rate cut may occur in June. It is expected that the total rate cut will be 75 basis points this year. If the Bank of Canada suspends interest rate cuts and states that it will wait for a detailed assessment of the impact of tariffs before making a decision, the market's expectations of the Fed's interest rate cut may cool down. If the Bank of Canada unexpectedly announces that it will continue to cut interest rates, expectations of the Fed's interest rate cuts are expected to continue to heat up.

Wall Street bank Goldman Sachs recently raised the US core PCE inflation index by 0.5% percentage points to 3.5% until the end of 2025, and is expected to rise to 4%, stressing that even the core PCE will be difficult to return to the 2% target anchored by the Federal Reserve. In February of this year, the core PCE index increased 2.8% year over year.

Furthermore, Goldman Sachs's latest forecast shows that the US economic growth rate will be only 0.5% in 2025, and the possibility of falling into recession in the next 12 months is as high as 45%. In terms of interest rate cut expectations, the Goldman Sachs benchmark scenario predicts that the Fed will cut interest rates by 25 basis points each in June, July, and September to deal with the risk of a more severe decline in the labor market; if the US economy falls into recession and the unemployment rate rises sharply, Goldman Sachs expects the Fed to cut interest rates by more than 200 basis points in the next year, and indicates that historically, the US usually cuts interest rates by 400-500 basis points during recessions.

Economists and traders generally expect that Bank of Canada policymakers, led by Central Bank Governor Tiff McClum, will keep the policy interest rate unchanged at 2.75%. This will be the first time in eight monetary policy meetings that interest rate changes will be suspended. However, economists believe that this decision is still a delicate balance of forces judgement — among the 30 economists covered by the institutional survey, 17 expected the Bank of Canada to keep interest rates unchanged, while the rest expected to continue to cut interest rates.

As the tariff policy announced by Trump is bound to impact Canada's already weak economic growth process, the Bank of Canada is likely to suspend interest rate cuts in the short term and wait until more clear economic data and global trade conditions are clear before making decisions. This policy expectation also reflects the market's uncertainty about the Canadian economy and inflation expectations. In particular, the Canadian economy is affected by Trump's trade policy. Canada has long been America's largest trading partner.

Trump exempted Canada and Mexico from “equal tariffs” earlier this month, but he still strictly imposes tariffs of more than 20% on various Canadian products (including automobiles, steel, and aluminum, and other important Canadian exports to the US). Newly appointed Canadian Prime Minister Mark Carney (Mark Carney) has strongly countered the tariff policy initiated by the Trump administration, levying import duties of up to 25% on some US goods, even though he announced some exemptions on Tuesday.

This wave of extremely unstable and rapidly evolving tariff policy shocks has dampened the optimism of Canadian businesses and consumers. It prompted economists to lower Canada's economic growth expectations and raise Canada's inflation expectations — causing what is known as a “stagflation” economic outlook to heat up sharply. “Stagflation” can be described as an economic dilemma that central banks are least willing to see. Under this difficult situation, the space for central banks such as the Federal Reserve to cut interest rates to boost the economy is seriously limited.

This situation has also made the Bank of Canada's decision-making process more complicated. In his speech on March 20, before the “Liberation Day” tariff statement announced by Trump caused sharp fluctuations in the market, Macram said that the Bank of Canada “will carry out fewer forward-looking monetary policy operations than normal until the situation is more clear,” and warned that when the situation is more clear, the central bank may act more quickly.

On the same day, Macram told reporters that policymakers may ultimately not provide more detailed economic outlook and inflation forecasts usually published along with the central bank's quarterly monetary policy report. Instead, central banks may choose to provide a range of actual policy results, as in the early days of the COVID-19 pandemic in April 2020.

“Due to widespread uncertainty, and the 'Liberation Day' results were better than actual expectations, we do not expect the Bank of Canada to cut interest rates on Wednesday.” Ian Pollick (Ian Pollick), head of global fixed income, currency and commodity strategy at the Canadian Imperial Bank of Commerce (CIBC), said in an interview.

Although the possibility of a further 25 basis point drop still exists, it is also likely to be opposed by some members of the Monetary Policy Committee. A summary of the monetary policy meeting discussed by relevant central bank officials shows that policymakers discussed suspending interest rate cuts in March, and some members suggested waiting for more economic data before making further adjustments.

Since June of last year, due to continued economic weakness, the Bank of Canada has drastically relaxed its monetary policy. Compared with the US and other American countries, Canada has made good positive progress in controlling inflation. Meanwhile, the core inflation indicator is close to the upper limit of the central bank's target range.

Statistics Canada reported on Tuesday that inflation unexpectedly cooled in March. Although this data initially drove the overnight swap market to expect a similar possibility of suspending interest rate cuts on Wednesday, the market now believes that the probability of keeping the benchmark policy interest rate unchanged is about two-thirds.

There are also many reasons why the Bank of Canada's decisions are more cautious. Among them, America's trade policy towards its North American neighbors and the world changes almost every day, and each new announcement causes sharp fluctuations in the bond and stock markets.

Bank of Canada officials recently generally warned that they must not turn the price shock that may be brought about by the trade war into a continuous rise in inflation, thereby limiting them to help industries affected by the dispute by cutting interest rates. The Bank of Canada's own investigation has begun to show that Canadian inflation expectations are rising significantly due to tariffs.

“In a financial crisis or pandemic, time is of the essence. However, in trade wars, the situation usually develops more slowly.” Royce Mendes, head of interest rates and macro strategy at Desjardins Securities, wrote in a report. “Bank of Canada officials have enough time to rush to make decisions they may regret later.”

Meanwhile, the US is Canada's largest trading partner. If the global tariff war continues, weak US growth will eventually have a serious impact on the Canadian economy.

“However, Canada has enough 'medicine' to meet this challenge, fiscal stimulus at the federal and provincial levels, and the Bank of Canada's continued easing policies will help it ease the symptoms of the economic downturn and recover more quickly,” economists Claire Fan and Nathan Janzen from the Royal Bank of Canada (RBC) wrote in a report.

The agency's economists said they expect to continue to cut interest rates by 25 basis points on Wednesday because the Bank of Canada has indicated in its March decision that it is willing to support Canada's economic growth, and it is expected that the Canadian economy may weaken further in the future due to heavy tariff pressure.

One factor that favors the Bank of Canada's suspension of interest rate cuts is that Canada is still in the election period.

“I generally disapprove of political considerations in decision-making.” Eric Lascelles, chief economist at RBC Global Asset Management, said in an interview. “But for central bank officials, if you're unsure whether to cut interest rates in the face of intense pressure from the Trump administration's tariff policy, you probably don't want to make conspicuous decisions a few weeks before the election.” he said.