By Indradip Ghosh and Mumal Rathore
BENGALURU (Reuters) -The Bank of Canada will hold its overnight interest rate steady at 2.75% on July 30 for the third consecutive meeting thanks to a recent rise in inflation and a fall in unemployment, according to a Reuters poll of economists that still found many expect at least two more cuts this year.
The Canadian central bank has cut rates by a total of 225 basis points since June 2024, but has been on hold since March as policymakers await news on where a confusing barrage of U.S. tariff threats will eventually settle.
The trade outcome is crucial to the outlook, given that more than 80% of Canada’s exports go to its southern neighbour.
Hefty import duties on goods ranging from steel and aluminium to automobiles have already dampened Canadian business and household sentiment.
A recent threat from U.S. President Donald Trump to impose an across-the-board 35% tariff on goods not covered by the existing free trade agreement between Canada, the U.S. and Mexico has led to further confusion.
That lack of clarity, combined with recent data on inflation and jobs, will keep the BoC on the sidelines next week, according to all 28 economists in the July 21-25 Reuters survey.
“In response to unexpectedly positive data and renewed trade tensions … we expect the Bank to continue to hold rates,” wrote James Knightley, chief international economist at ING.
“Nonetheless, with the risks skewed toward more economic weakness, we think risks are towards two, rather than just one, rate cut before the end of the year.”
Nearly two-thirds of the economists surveyed, 18 of 28, forecast that the BoC would cut its policy rate by 25 basis points in September to 2.50%. While there was no clear consensus on where that rate would be by the end of 2025, more than 60% of the economists – 17 – predicted at least two more reductions this year, including five who predicted three.
Canada’s economy, which shrank 0.1% in April after growing at an annualised pace of 2.2% in the first quarter, is expected to have contracted 0.5% in the second quarter, according to the median forecast in the poll.
It is forecast to stagnate this quarter before expanding 0.8% in the fourth quarter, with the economy forecast to grow an average 1.3% this year and in 2026.
Nearly half of the forecasters – 10 of 21 – expect the economy to enter a technical recession, defined as two consecutive quarters of contraction, at some point this year.
Businesses remain cautious and are keeping hiring and investment under check, the latest BoC survey showed earlier this week.
Demand in the housing market, a pillar of the economy and household wealth, has remained weak despite falling interest rates and house prices.
“Interest rates don’t appear to be low enough to stimulate housing activity, and business capital spending is likely to be muted until it’s clear the Canada-U.S.-Mexico trade deal will be renewed,” said Avery Shenfeld, chief economist at CIBC Capital Markets.
“So barring a much better outcome for trade talks than we currently expect, we see the BoC cutting rates two more times over the balance of the year.”
Canadian inflation, which rose to 1.9% last month, is expected to average around 2% – the midpoint of the BoC’s 1%-3% target – through at least 2027, though core price pressures are likely to remain elevated, median forecasts in the poll showed.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh and Mumal Rathore; Polling by Debrah Gomes; Editing by Ross Finley and Paul Simao)
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