‘Compelling reasons’ remain for a Bank of Canada cut in March: National Bank #CanadaFinance

There are “compelling reasons” to expect another Bank of Canada (BoC) interest rate cut in March, in spite of recent economic data that have led the market to lean against it, a National Bank of Canada economist says.

In a note that labels itself “an increasingly contrarian take,” economist Taylor Schleich writes that various signals from the BoC suggest that it might not be swayed by delayed U.S. tariffs, strong January jobs figures and hotter-than-expected inflation numbers.

“Simply put, there remains a case for an ‘insurance cut’, allowing policymakers to cushion the blow of tariff uncertainty and potentially, tariffs themselves,” he wrote.

Schleich notes that market odds for a March cut are now less than one-in-three, a sharp shift from three weeks ago when a cut “was fully priced.” The once-high expectations for another cut began to decline when U.S. President Donald Trump and Prime Minister Justin Trudeau agreed in early February to an 11th-hour pause on tariffs. Then, days later, data on January jobs exceeded analysts’ expectations. And earlier this week, Consumer Price Index data for January showed inflation edging up on various measures.

But there are hints in recent BoC communications that those factors might not carry as much weight, Schleich writes.

On inflation, Schleich says, the BoC understood that the government’s tax holiday made December’s headline inflation numbers look cooler than they were. But the Bank’s latest Monetary Policy Report (MPR), released alongside the January rate-cut announcement, featured “no warnings about upward underlying pressures,” he writes.

“The Bank even implied that its ‘preferred’ inflation indicators (which were/are hotter) were sending a false signal,” Schleich said. The MPR suggests the Bank has focused more on inflation breadth, Schleich says — a measure of how pervasive inflation is across different categories — and that has remained under control.

On jobs, the summary of the BoC’s deliberations ahead of the January rate cut suggests the Bank hasn’t been moved by a strong run of Labour Force Survey (LFS) data, Schleich says, citing a passage in the deliberations that notes “according to multiple indicators, the job market remained soft…”

Those indicators, the National Bank document says, include business hiring intentions, which are “below historical averages” and the Survey of Employment, Payrolls and Hours — a different measure of employment — which “is signalling the opposite of what the LFS is.” Canada’s job vacancy rate, furthermore, is at “a seven-year low,” Schleich says.

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