C.D. Howe Institute Monetary Policy Council Calls for Bank of Canada to Cut Overnight Rate to 2.75 Percent Next Week and 2.50 Percent in September

March 6, 2025 – The C.D. Howe Institute’s Monetary Policy Council (MPC) calls for the Bank of Canada to lower its target for the overnight rate, its benchmark policy interest rate, to 2.75 percent at its next announcement on March 12^th. The MPC further calls for the Bank to leave its target unchanged at 2.75 percent at the following announcement in April, before cutting to 2.50 percent in September, and maintaining it at that level in March 2026.

The MPC provides an independent assessment of the monetary stance consistent with the Bank of Canada’s 2 percent inflation target. MPC co-chair Jeremy Kronick, the Institute’s Vice-President, Economic Analysis and Strategy, chaired this meeting. MPC members make recommendations for the Bank of Canada’s target for the overnight rate at its upcoming announcement, the subsequent announcement, and the announcements six months and one year ahead. The Council’s formal recommendation for each announcement is the median vote of members attending the meeting.

This meeting occurred under significant uncertainty stemming from tariffs imposed by the United States on Canadian goods. Uncertainty as to the size of the tariffs and their duration weighed heavily on MPC members’ ability to forecast where economic growth and inflation were headed.

All eight MPC members attending the meeting recommended a cut to 2.75 percent next week. Members were split on the April setting, with half recommending holding at 2.75 percent and the other half recommending a cut to 2.50 percent. By September, the range had widened: from 2.00 to 2.75 percent. The same range held for March 2026, with no member changing their September call.

Members agreed that because of the uncertainty on the tariff front, incoming data – which occur typically with a lag – does not provide much of an indication of where the Canadian economy is headed. It is difficult to calibrate forecasting models in this environment, which will compound the difficulty for the Bank of Canada. Members were mixed on what the data had been saying about the state of Canada’s economy before these tariff threats emerged, with some feeling like the economy was largely in balance, while others were more uncertain. Members expressed concern over the state of business investment prior to these threats, a situation likely to worsen.

More generally, members discussed the potential for stagflation in the Canadian economy. Tariffs from the United States, and potential retaliation here in Canada, will be inflationary. However, the impact on unemployment and, therefore, on aggregate demand will be severe. Some members felt that the effect on aggregate demand will offset the inflationary effect from the tariffs, while others felt that it would not, which would leave the Bank of Canada in a tough spot. Part of the determination for the Bank in that scenario would be the extent to which the tariffs are temporary, and what kind of knock-on effects on price setting and inflation expectations they might have. However, with respect to the announcement next week, members voted unanimously to cut, arguing that it sent a signal of support during what are likely to be volatile times ahead.

Members also discussed the role fiscal policy will play if the more severe tariff scenarios come to pass. Members mentioned that while our fiscal situation is not where it was pre-pandemic, it is better than the United States’ and there remained room to support the Canadian economy. Members were concerned that there might be constraints to what fiscal authorities can do given Parliament is not sitting and we might be headed for an election.

Members also made mention of the impact a global trade war will have on slowing global economic growth, which will have an offsetting effect on global inflation, and will affect matters here at home.  Members discussed the state of the US economy, which faced inflationary pressures prior to this threat, and even though tariffs promise to make this worse, markets are now betting on more rate cuts from the Federal Reserve in 2025 than they had previously expected. Members noted it will then be important to assess the impact of the spread between Canada and US policy rates and its effect on the exchange rate between the two countries.

The views and opinions expressed by the participants are their own and do not necessarily reflect the views of the organizations with which they are affiliated, or those of the C.D. Howe Institute. Forecasters’ recommendations may differ from their predictions.

The MPC’s next vote will take place on April 10, 2025, prior to the Bank of Canada’s overnight rate announcement on April 16.

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For more information, contact: Mawakina Bafale, Research Officer, e-mail: mbafale@cdhowe.org and Lauren Malyk, Manager, Communications, e-mail: lmalyk@cdhowe.org.