The Bank of Canada (BoC) is poised to implement another rate cut on Wednesday, continuing its aggressive easing cycle. Since June 2024, the BoC has slashed borrowing costs by a cumulative 175 basis points. The central bank's anticipated decision contrasts with the approach of the United States Federal Reserve, which is expected to maintain its current interest rates. This divergence in monetary policy highlights the economic challenges facing Canada, particularly in light of its close trade ties with the US.
At its upcoming meeting, the BoC is expected to lower its policy rate by an additional 25 basis points, marking the sixth consecutive meeting where a rate cut has been enacted. This move would bring the cash rate down to 3%, the lowest level in more than two years. Meanwhile, the Federal Reserve is expected to keep its rates steady within the 4.25%-4.5% range. The Fed has indicated plans for gradual rate reductions, though a robust US economy might result in only one or two cuts in 2025.
The economic interdependence between Canada and the United States is significant, with approximately 76% of Canadian exports destined for its southern neighbor. However, looming trade tensions, exacerbated by tariffs introduced by former President Trump, pose a substantial threat to the Canadian economy. Bank of Canada Governor Macklem has identified these trade threats as a "major new uncertainty," even before Trump's tenure began.
Recently, the Canadian dollar, known colloquially as the loonie, has experienced a decline of over 6% against the US dollar since September 2024. Despite being steady on Wednesday, any further rate cuts by the BoC, coupled with a stable Fed rate, are likely to exert additional downward pressure on the currency due to an expanding US/Canada rate differential.
The BoC's current benchmark rate stands at 3.25%, and today's meeting marks a rare occasion where it coincides with the Federal Reserve's rate announcement. Market participants are keenly watching the BoC's decision, given widespread expectations for a rate reduction.