The Royal Bank of Canada (RBC) is one of the institutions that wish that the Central Bank does not receive its key rate, despite the risk of economic slowdown in certain sectors.
Frances Donald, the first vice-president and chief economist of the RBC, believes that the Banque du Canada will be able to reduce its key rate because of the “weakness pockets” of the Canadian economy, such as a lagging house and sectors affected by the trade war.
“On the other hand, it is necessary to ask whether a drop in the master rate would really help to solve the problems affecting the Canadian economy,” she adds.
The key rate is an instrument that affects all Canadians and all markets, no matter if they really need support, says Donald.
For example, a drop in the master rate would affect the Windsor region as much, whose unemployment rate exceeds 11 % as that of Victoria where this rate is less than 4 %.
“A reduction in the key rate would undoubtedly be inappropriate in such an economic environment,” says Donald.
RBC rather wants the industries and municipalities dependent on manufacturing production to receive targeted government aid.
After having reduced it a quarter of a point in March, the central bank maintained its key rate to 2.75 % in April and June.
Following the latest employment data showing unexpected progress and stable inflation at around 3 %, economists expect the central bank to follow the same path in its next announcement on July 30.
A majority of economists believe that the Banque du Canada will once or twice its key rate by the end of the year before interrupting the movement. According to them, the economy will need a little help when inflation is controlled.
Even if it is less optimistic than the Royal Bank and considers that Canada has already entered a recession period, the Oxford Economics firm does not believe that the central bank will reduce its key rate.
In an update of her forecasts, she says she expects losses in the coming months. She also believes that inflation could increase to 3 % by the middle of 2026 because of customs duties and tensions that they will create on the supply chain.
Oxford Economics argues that the Banque du Canada will want to counter any prices increase and will maintain its key rate even if growth stagnates because of the trade war.
Donald concedes that consumers, already bruised by the increase in inflation after the pandemic, feel fearful when they see prices getting in shops.
The Bank of Montreal, it provides three other decreases in the key rate, the last to occur in March 2026.
Its chief economist, Doug Porter, accepts the arguments defending a reduced drop in the key rate or even stabilization.
“We can observe the expectations of the financial markets. They are very good judges. And currently, they hope for another reduction, ”he says.
Porter says the federal government intends to increase its military spending in the coming months and investments in infrastructure, which could remove pressure from the Banque du Canada to reduce the key rate.
