With the potential for millions of Canadians to see a bit of extra money in their pocket this spring from planned federal and provincial rebate cheques, a new report is suggesting the added money could mean at least one less interest rate cut by the Bank of Canada in the next year.
The report from TD Economics, released Wednesday, suggests the central bank will continue its rate-cutting cycle but with the planned cheques there may be less need for it to continue into 2025 at the same speed.
“The Bank of Canada has been cutting interest rates because they fear that the economy is so weak that they need to provide extra stimulus through lower interest rates,” James Orlando, director of economics at TD Bank, said in an interview.
“But as the economy is stronger because the government’s stepping in to provide stimulus of its own, then maybe the Bank doesn’t need to cut rates as much as it otherwise would have.”
Orlando said when economists look at the expected cheques from both the federal government, and another $200 from the Ontario government, they try to determine how many will spend such money and how many would save.
He expects it to be about half who will save and pay down debt, while another half who will spend and inject money into Canada’s economy, which has prompted TD to amend its own forecast to see one less rate cut than previously expected.
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That injection would likely mean a stronger Canadian economy and as a result the central bank may feel they can ease back on how much they cut.
Orlando said it’s expected the Bank will still make a cut of 25 basis points in December and another possibility of a similar slash to the key interest rate in January.
But after that, Canadians might see a shift.
“As we get rates lower and lower, the Bank of Canada is going to enter this probing period where they’re going to be like, ‘OK, lets cut one meeting and then we might take a pause to see how the economy is responding,’” he said.
This could mean we see an interest rate cut of 25 basis points every other meeting, with TD anticipating the policy rate to rest at 2.50 per cent by the end of next year.
There could still be some changes, though, with Orlando noting that if even more Canadians spend as a result of the rebates, it is possible the Bank of Canada could have two fewer rate cuts instead of one.
TD economists warn there is still uncertainty ahead, noting the recent threat by U.S. president-elect Donald Trump to impose a 25-per cent tariff on Canadian goods and the impact this could have on the dollar.
“I think the severity the tariffs that would come towards Canada from the United States is really the one factor that can just blow up the entire forecast when it comes to Canadian economic growth,” Orlando said.
With TD forecasting economic growth to rebound in 2025 without tariffs, such big tariffs could put it into negative territory.
However, Orlando cautions at this time economists aren’t expecting such a drastic move, suggesting based on previous instances that negotiations could see fewer strain.
“This is the worst case outcome, and it’s also not the baseline outcome for any economist right now,” he said. “It’s just something we’re watching and we’re hoping cooler heads will prevail.”
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