EconoFACTS

February 12, 2025 | 14:09

BoC Summary of Deliberations (Jan. 29) — Eye on Tariffs

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

The summary of Governing Council deliberations leading into the January 29th Bank of Canada policy decision didn’t reveal too much new information. Recall that the Bank cut rates by 25 bps at this meeting as trade tensions were building.

There are really two things going on at once for the Bank—the evolution of the underlying economy and the increasing tariff risk.

The underlying economy is responding well to past easing. The Bank notes that, “growth was expected to strengthen further as interest rate cuts continued to work through the economy. With the pace of growth slightly above the growth of potential output in the outlook, excess supply would gradually be taken up over the projection horizon”.

At the same time, “members agreed that underlying inflation looked to be close to 2%”, despite some firmer readings in recent months. Lingering shelter inflation is still lifting some of the traditional inflation measures, while other measures (e.g., the share of items above 3%, or surveyed responses) are more comforting to the Bank.

On trade risk, the Bank is clearly concerned and preempting some of that risk likely tipped them to cut rates at this meeting. On the Banks reaction function to tariffs, however, there is little new information here.

To quote: “Members agreed that in setting monetary policy, they would need to consider the downward pressure on inflation from weakness in the economy and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions… In other words, in setting monetary policy, they would need to continuously gauge the effects of a trade conflict in real time as new developments unfolded”.

Our view is that tariffs and retaliation, such as those that loomed on February 3rd, would be more negative for growth than for inflation (i.e., higher inflation), leading the Bank to ease further this year. That said, it does look as though any such easing by the Bank could be slowed down by the uncertainty on how these factors play out.

The Bottom Line: Firming growth, inflation around 2% and the policy rate in the neutral range likely has the Bank eyeing a pause. Any response to tariffs would likely be cautious early on.