Bank of Canada Rate Cuts by End-2025: UBS Forecasts 50bps Reduction Amid Shifting Economic Tides

Markets are pricing in a significant pivot for Canadian monetary policy, with UBS projecting the Bank of Canada (BoC) will cut interest rates by 50 basis points (bps) by the end of 2025. This forecast contrasts with the BoC’s current policy rate of 2.75%—held steady in April 2025 amid global trade uncertainties—but reflects UBS’s analysis of cooling inflation, resilient housing markets, and a gradual economic slowdown. For investors, the prediction underscores a critical shift in expectations for Canada’s monetary landscape.

UBS’s Case for Rate Cuts: Inflation, Trade, and Labor Markets

UBS’s 50bps forecast hinges on two key 25bps reductions in the third and fourth quarters of 2025. The investment bank argues that core inflation will ease below 2% by late 2025, driven by falling global oil prices, the removal of Canada’s consumer carbon tax (effective April 2025), and a moderation in wage growth. While headline inflation in March 2025 stood at 2.3%, UBS anticipates further declines as supply chain pressures ease and trade-related tariff impacts stabilize.

The Canadian housing market’s resilience also plays a central role. Unlike the U.S., where housing has softened significantly, Canada’s sector remains supported by strong rent growth and limited supply, reducing the urgency for aggressive rate hikes. UBS analysts note that a “gradual softening” in labor markets—rather than a sharp downturn—will allow the BoC to pivot toward easing without triggering a severe economic contraction.

The Bank of Canada’s Dilemma: Balancing Trade Risks and Growth

The BoC’s April 2025 Monetary Policy Report (MPR) emphasized extreme uncertainty stemming from U.S. trade policies, which threaten to disrupt both inflation and growth. The central bank outlined two scenarios:
1. Limited Tariff Scenario: Moderate trade disputes would lead to temporary economic softness, with inflation settling near 2%.
2. Protracted Trade War Scenario: Persistent tariffs could push inflation above 3% by 2026 and trigger a 2025 recession.

Despite these risks, UBS argues the BoC will prioritize easing monetary conditions to support growth, particularly if global oil prices remain subdued and shelter costs (a major inflation component) continue to decelerate. The bank’s cautious stance in April—holding rates steady—aligns with this outlook, as policymakers await clearer data on trade impacts and inflation durability.

Implications for Investors: CAD, Equities, and Bonds

UBS’s rate-cut forecast carries significant implications across asset classes:
- Canadian Dollar (CAD): UBS predicts the USDCAD exchange rate will rise to 1.44–1.46 by year-end 2025, as weaker Canadian inflation and rate cuts outpace U.S. monetary tightening. A weaker CAD could boost export-oriented sectors like energy and manufacturing.
- Equities: Rate cuts typically favor equities, particularly financials and real estate, which benefit from lower borrowing costs. However, trade-related risks could pressure industrials and materials stocks.
- Bonds: The 10-year Government of Canada bond yield is expected to decline from its current 3.6% to around 3.1% by late 2025, reflecting reduced inflation expectations and accommodative policy.

Risks to the Outlook: Trade, Inflation, and Policy Missteps

UBS’s scenario is not without risks. A prolonged U.S. trade war could reignite inflation, forcing the BoC to delay or reverse cuts. Similarly, stronger-than-expected wage growth or a housing market correction could undermine the case for easing. Investors should monitor core inflation (excluding energy and food) and average hourly earnings data closely, as these metrics will guide the BoC’s next moves.

Conclusion: Positioning for a Pivotal Shift

UBS’s 50bps rate-cut prediction for 2025 reflects a nuanced view of Canada’s economic trajectory—a blend of cooling inflation, resilient housing, and cautious trade policies. While the BoC’s April decision to hold rates steady underscores near-term caution, the path toward easing appears increasingly plausible. Investors should prepare for a weaker CAD and a gradual decline in bond yields, while maintaining flexibility to pivot if trade risks escalate.

The BoC’s final move will hinge on data: if inflation trends align with UBS’s forecast (core inflation below 2% by late 2025), markets are likely to price in a full 50bps reduction. Failure to meet these targets could prolong the status quo, leaving Canadian assets in a holding pattern. For now, the stage is set for a pivotal year in Canadian monetary policy—and investors must stay vigilant to navigate it.