Survey reveals market expectation for mid-year cut as inflation and trade risks persist
Canadian market participants now expect the Bank of Canada’s (BoC) benchmark interest rate to drop to 2.25% by the end of 2025, down from the current level of 2.75%, according to a central bank survey released Monday.
The BoC survey, conducted in mid-March with input from approximately 30 financial market participants, revealed a median forecast that sees the central bank’s target overnight rate falling to 2.25% by July 2025, and staying there through year-end.
The findings come at a time when Canada is navigating both domestic inflationary pressures and the sweeping new tariffs imposed by the US.
The policy rate is currently being held at 2.75% after the Bank of Canada left it unchanged earlier this month. The central bank said it needs more time to assess the full impact of US president Donald Trump’s recently announced reciprocal-tariff policy, which has already disrupted global equity and capital markets.
Canada now faces a 25% US tariff on vehicles, steel, aluminum, and other imports deemed non-compliant with the US-Mexico-Canada trade agreement. The US has also threatened to extend these tariffs to auto parts, potentially as early as next month.
The Bank of Canada warned that rising prices tied to tariffs could “spread across the economy,” complicating its efforts to guide inflation back to its 2% target. Nearly two-thirds of survey participants said they expect inflation to remain above 2% through 2025 and 2026, with about 20% predicting it could accelerate to between 3% and 4% by the end of this year.
Despite the inflationary backdrop, financial institutions remain divided over the BoC’s next move. Scotiabank revised its outlook sharply, projecting three rate cuts in 2026, a shift from its previous view that the central bank had already reached its terminal rate.
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“We now forecast the Federal Reserve will keep its policy rate at the current level through the remainder of the year given the inflationary consequences of its tariff policy,” Scotiabank said in its latest report. “The Bank of Canada is currently forecast to keep its rate at 2.75% for the remainder of the year, but that assessment may change as we see how inflation and growth evolve in coming months.
“There is no doubt that economies will flirt with recession owing to the tariffs and associated uncertainty.”
Under Scotiabank’s base case, the Bank of Canada would lower its policy rate by a total of 75 basis points in 2026 to support what it described as a still-fragile recovery.
Scotiabank’s outlook puts it at odds with other major Canadian banks. BMO, TD, and CIBC continue to expect the BoC to cut rates later this year and then remain on hold. National Bank and RBC also forecast two or three quarter-point cuts in 2025, but both expect the central bank to raise rates again in 2026 as economic conditions improve.
For now, the Bank of Canada is holding firm, reiterating that it will remain cautious as it evaluates the impact of tariff-driven price shocks on both consumer inflation and the broader economy. The central bank's ongoing challenge is balancing slowing growth with inflation that still risks remaining above target.
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