Bank of Canada could be ‘one and done’ in 2025: economists

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The Bank of Canada is expected to cut another quarter point off its interest rate tomorrow, but what if it stops there?

That’s the prediction of Bank of America economists who think Canada’s central bank will cut 25 basis points on Jan. 29 and then hold its key rate at 3 per cent.

“We expect the forward guidance to signal a pause as the BoC waits to see how both domestic activity and U.S. trade policy play out,” said the economists led by Carlos Capistran.

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“With inflation mostly under control and under our expectation that activity will keep improving we see 3 per cent as the terminal rate.”

Their rate prediction is higher than most Canadian economists and the markets that are betting on two full cuts from the Bank of Canada this year.

They reason that though there were still signs of weakness in the fourth quarter, the economy is recovering, as shown by December’s strong jobs report.

Inflation in Canada is mostly under control, but as the economy recovers core measures which remain above target are unlikely to fall more, they said.

In fact, one risk they list to their forecast is that the Bank of Canada could hold on Wednesday because of concerns over core inflation.

Bank of America’s U.S. economists also expect the Federal Reserve to remain on hold this year, which could limit what the Bank of Canada can do.

A big wild card is the threat of President Donald Trump’s tariffs, which could throw Canada into recession if imposed and force the Bank of Canada to cut rates further.

But Bank of America’s base case assumes there will be no tariffs, just “a continuous looming threat of tariffs until the USMCA trade agreement is reviewed.”

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Whether they are right remains to be seen. This week Trump ramped up his threats, pledging to impose duties on specific sectors including automobiles from Canada and Mexico, countries he has already threatened with 25-per-cent universal tariffs as soon as Feb. 1.

The tariff risk premium and market bets on the Bank of Canada’s terminal rate will be key drivers for the Canadian dollar in the months ahead, says BofA.

Since the U.S. election the loonie has fall to 69.44 cents U.S., reflecting the tariff risk priced into USDCAD. If the U.S. does not immediately impose tariffs on Canada next week BofA expects the currency to rise to 70.04 cents U.S.

If the rate gap between the Bank of Canada and Fed also narrows in coming weeks the loonie could rise to 71.42 cents U.S.

But if tariffs are confirmed and the Bank of Canada turns dovish, the economists see the Canadian dollar sinking as low as 64.51 cents U.S.

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Nvidia Corp. shares plunged Monday in one of the biggest stock selloffs in history on concerns that Chinese startup DeepSeek’s AI model would reduce the need for the hardware the chip company offers.

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The company tumbled 17 per cent, the biggest decline since March 2020 and erased $589 billion in market value, a record drop, reports Bloomberg. Shares were up 5 per cent this morning in pre-market.

DeepSeek, founded by quant hedge fund chief Liang Wenfeng, was the talk of Wall Street, but was apparently too busy to relish it, said Deutsche Bank Research.

When their analysts asked it how it felt about all the attention it was getting, it replied: “Oops! DeepSeek is experiencing high traffic at the moment. Please check back in a little while.”

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The new year is a good time to reassess your investments and prepare for the year ahead. Financial planner Jason Health has four things you should be considering with your investment adviser if you have one, or on your own if you are a self-directed investor, so you can start the year off right. Find out more 

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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.

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

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