Posthaste: How the Bank of Canada could help borrowers without cutting interest rates tomorrow

The

Bank of Canada

is widely expected to hold its key

interest rate

at 2.25 per cent when policymakers meet tomorrow, but Canadians looking for relief on borrowing costs might still be in luck, says one economist.

As “storm clouds begin to gather again,” the central bank should be more concerned about the economy than “theoretical upside inflation risks,” said

Royce Mendes, head of macro strategy at Desjardins Group.

Headline inflation

came in hotter than expected in December, but the Bank of Canada’s core measures decelerated and Desjardins’ analysis suggests that underlying inflation now sits just above 2 per cent.

“From a strictly data-driven perspective, there is little reason for the Bank of Canada to sound hawkish on inflation,” said Mendes.

There are, though, reasons to be concerned about the economy, he said.

Recent economic data suggests growth is slowing and business confidence is weak, as shown in the central bank’s own

Business Outlook Survey.

“With CEOs largely in wait‑and‑see mode ahead of the upcoming CUSMA review, uncertainty is reinforcing a vicious cycle — one where households grow increasingly concerned about job security,” said Mendes.

Housing markets

, sensitive to interest rates, continue to soften across the country, with buyer confidence “fragile.” Mendes points out that fewer than 15 per cent of renters plan to buy a home over the next year, the weakest showing since 2020.

There are “tailwinds” on the horizon, such as federal fiscal stimulus and a pickup in population growth, but these are not likely to boost activity until late 2026 or 2027.

“The risk in the near term is that the economy hits an air pocket,” said Mendes.

Much hinges on upcoming negotiations for the

Canada-United-States-Mexico Agreement (CUSMA)

, and relations on this front recently turned stormy.

U.S. President Donald Trump over the weekend

threatened Canada with 100 per cent tariffs

if Ottawa reached a trade deal with China, a move observers believe was at least partly driven by Prime Minister Mark Carney’s speech at Davos last week urging “middle” nations to stand up to the world’s great powers.

“You may not see an explicit reference to the USMCA [CUSMA] review in the BoC’s rate statement but make no mistake, this is weighing on them,” said economists with National Bank of Canada.

“To us, it will be difficult (impossible?) for expected rate hikes to materialize later this year if Canada’s already tenuous trade relationship with the U.S. breaks down further and preferential market access is seriously compromised or lost altogether.”

With no rate change expected Wednesday, the market will be watching the Bank of Canada’s statement and monetary policy report for clues on its next move. Since the central bank first paused rates in December, market bets have swung from further rate cuts to rate hikes and back again.

A “dovish” tone from policymakers tomorrow could potentially help borrowers, said Mendes.

If the Bank of Canada stresses economic risks over inflation, market expectations of a rate hike could fall and bets on further cuts could rise, pushing down the bond yields that influence fixed mortgage rates.

“Even if rate cuts aren’t in the offing any time soon, a dovish tone in next week’s communiqué could help lower borrowing rates,” said Mendes.

“It’s the least they can do given the current situation.”

No guarantees though.

National Bank economists Taylor Schleich and Ethan Currie think it unlikely that policymakers will “validate the hawks or the doves” Wednesday.

They expect a Bank of Canada statement that balances strengths and weaknesses and finds that the policy rate is “at about the right level.”

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Bulls were leading the charge in Bank of America’s January Fund Manager Survey when nearly half of participants said they did not have protection against a sharp fall in equity prices, the highest share since 2018.

The survey, which was taken before Donald Trump’s Greenland escalation and the market wobble that followed, found that cash levels are at a record low of 3.2 per cent and 34 per cent of those surveyed expect a boom in the next 12 months — “the highest since the heady post-COVID days of 2021.”

The findings pushed the BofA Bull & Bear Indicator to a “hyper-bull” 9.4 that signals investors should increase risk hedges and safe havens.

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s

Financial Post column

can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his

mortgage rate page

for Canada’s lowest national mortgage rates, updated daily.

Financial Post on YouTube

Visit the Financial Post’s

YouTube channel

for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at 

posthaste@postmedia.com

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