07:47 AM EST, 02/13/2025 (MT Newswires) -- A shift in Bank of Canada communication and improved data reduced RBC's confidence in a 25bps cut at the BoC meeting on March 12.

It is a "tricky" call, especially ahead of some key data points and looming United States trade tariff threats, but the bank thinks a hold with a "low-medium" conviction of 65) is the most likely outcome. Two and arguably three straight strong jobs reports, three straight solid month-over-month core inflation prints and Q4 gross domestic product tracking just under 2% are supportive of a wait-and-see approach from the BoC near-term.

This is especially the case after bringing the policy rate into the BoC's estimated neutral range, noted RBC. Importantly, the BoC communication has shifted, reflecting a more optimistic tone on growth, removing language suggesting further rate cuts in the January statement, and the January Monetary Policy Report reducing the starting point for excess supply along with bringing forward the timing -- Q1 versus H2 previously -- for the output gap shrinking.

There is still important data between now and the March 12 meeting, such as CPI next Tuesday, GDP on Feb. 28, the Labour Force Survey (LFS) on March 7, that could influence RBC's call. GDP and inflation will be the most important with the LFS taking a backseat after multiple months of strength, particularly in full-time hiring.

With the qualification that the magnitude of surprises matters, softness across most of those reports may be needed for the BoC to deliver a cut based on fundamental reasons.

If the BoC moves to the sidelines in March, the onus will be on the data to soften -- and undershoot the forecast -- to resume the cutting cycle. The bank thinks this eventually occurs as the green shoots of sustained above-trend growth recovery are probably unsustainable (immigration, mortgage resets, tariff-threat induced hit to sentiment, and stabilizing residential investment) -- RBC's 2025 GDP forecast is 1.3% versus the BoC at 1.8%.

Coupled with the unemployment rate moving back to the highs and inflation risks to the downside over a medium-term horizon, this should be enough to tilt the balance back to cuts. The timing is uncertain, but for now, the bank has cuts resuming in April and terminal reaching 2.25% (2% previously) but the risks are to later instead of sooner.

If Q4 growth is confirmed around the BoC's forecast of 1.8% and Q1 shows preliminary signs (January nowcast) of being at, or above trend, RBC's conviction in a March hold would increase. There are downside risks to Q1, particularly a potential drag in February/March from depressed business sentiment from the uncertainty surrounding tariff risks, while consumption will be impacted by sentiment, the GST holiday and C$200 cheques distributed in Ontario.

The bank sees the output gap as particularly difficult to track in 2025, with potential GDP growth closely aligned with the uncertain magnitude of the immigration slowdown.