OTTAWA, Jan 27 (Reuters) - Economists and analysts anticipate that the Bank of Canada will likely reduce its key benchmark rate by 25 basis points this week. Additionally, it is widely expected that the Bank will provide an analysis on the potential impact of U.S. tariffs.
This marks the first announcement of a rate decision and economic projections by the central bank post the change in government in the United States, Canada's largest trading partner.
President Donald Trump, who assumed office last week, has been issuing threats of imposing tariffs on Canadian imports since his election victory in November. He has specified a potential 25% tariff on Canada starting from Feb. 1.
Businesses, investors, and economists have been left with uncertainty due to these announcements, casting a shadow over economic projections. Consequently, the Bank of Canada's monetary policy decision this week is deemed pivotal.
Thomas Ryan, an economist at Capital Economics, mentioned in a note, "With tariffs clouding the economic outlook, we judge that the Governing Council will opt for a 25bp (basis points) policy rate cut."
Currency swap markets are indicating an 83% likelihood of a rate cut on Wednesday.
If the expected rate cut materializes, the benchmark rate will decline to 3.0%. This adjustment would mark the sixth consecutive rate reduction since June, resulting in a total reduction of 200 basis points over seven months.
In a survey conducted among economists, 80%, or 25 out of 31 respondents, anticipate a quarter-point rate cut on Wednesday, representing a decrease from December's half-percentage-point adjustment.
However, forecasting future rates beyond the upcoming meeting has proven challenging due to the looming threat of tariffs on the Canadian economy.
The Governor of the Bank of Canada, Tiff Macklem, will announce the governing council's decision at 9:45 a.m. ET (1345 GMT) on Jan. 29. The bank will also publish its initial monetary policy report of the year, updating inflation and economic projections from October.
Economists are keen to see the bank's assessment of the potential impact of a 25% tariff on Canada and the probable consequences of retaliation. Jules Boudreau, Senior Economist at Mackenzie Investments, expressed interest in the scenario analysis of tariffs, stating, "I will be looking for the result of the scenario analysis (of tariffs) that show us how much they think it will impact the Canadian economy."
Nathan Janzen, Assistant Chief Economist at RBC, suggested that the Bank of Canada would need to cut rates to stimulate the economy and help reduce higher unemployment rates compared to the previous year. Janzen emphasized, "They are still not moving into a range of interest rates that would be really stimulative for the economy."