07:09 AM EST, 01/27/2025 (MT Newswires) -- The Bank of Canada is expected to cut interest rates at a more gradual 25bps pace on Wednesday following 50bps cuts in each of the two prior meetings -- widening a gap with United States policy rates as the Federal Reserve is widely expected to forego a January rate cut, said RBC.

The BoC is scheduled to release the policy statement on Wednesday, at 9:45 a.m. ET.

A weak Canadian economy has prompted earlier and more aggressive interest rate cuts from the BoC compared with other advanced economy central banks, noted RBC.

However, the 3.25% current overnight rate is still at the top end of the BoC's 2.25% to 3.25% estimated range for "neutral," which wouldn't put upward or downward pressure on growth or inflation over time.

It is also well above the 1.75% peak rate in the decade before the global pandemic, pointed out the bank.

The BoC communicated in its December policy decision that with the interest rate no longer at obviously "restrictive" levels, the pace of future rate cuts would likely be more gradual, and contingent on economic data.

Recent Canadian gross domestic product growth and inflation data have been mixed. Q4 GDP growth is tracking close to the BoC's 2% October forecast and inflation, excluding indirect taxes, ticked higher in December. The BoC's Q4 business outlook survey (BOS) flagged some improvement in business sentiment.

However, labor markets are still soft enough to argue that more interest rate cuts are needed for the economy to rebound enough to prevent inflation from undershooting the 2% target. RBC continues to expect the BoC will ultimately need to cut the overnight rate to a slightly stimulative 2% this year.

In December, BoC Governor Tiff Macklem also flagged downside risks to the growth outlook from potential protectionist U.S. trade policy as a "major new uncertainty." Those concerns have likely only become more pronounced with the new Donald Trump administration threatening to impose aggressive tariffs on imports from Canada as early as next month, added the bank.

RBC expects policymakers would be more likely to cut interest rates faster and further should those downside risks materialize with the ultimately disinflationary growth and labor market implications from tariff hikes more a concern than a one-time increase in prices.