The Bank of Canada has lowered its target for the overnight rate to 2.75%, reducing the Bank Rate to 3% and the deposit rate to 2.70%.
The decision comes as the Canadian economy enters 2025 in a strong position, with inflation near the 2% target and steady GDP growth.
However, escalating trade tensions and tariffs imposed by the United States are expected to slow economic activity and increase inflationary pressures in Canada.
Recent data indicates a slowdown in U.S. economic growth, with inflation slightly above target.
The euro zone experienced modest growth in late 2024, while China’s economy showed strength, supported by government policies.
Market expectations of weaker North American growth have led to declines in equity prices and lower bond yields.
Meanwhile, oil prices have been volatile, trading below previous forecasts. The Canadian dollar remains stable against the U.S. dollar but has weakened against other major currencies.
Canada’s economy expanded by 2.6% in the fourth quarter of 2024, following an upwardly revised 2.2% growth in the third quarter.
These figures exceeded earlier projections.
Previous interest rate cuts have supported economic activity, particularly in consumer spending and housing markets.
However, growth is expected to slow in early 2025 as trade conflicts dampen business confidence and investment.
Surveys indicate declining consumer sentiment and a reduction in business spending, with some firms delaying or canceling investment plans.
A recent surge in exports ahead of anticipated tariffs has partially offset the economic slowdown.
Employment growth remained strong from November through January, bringing the unemployment rate down to 6.6%.
However, job growth stalled in February, signaling potential risks to the labor market. Wage growth has also moderated in recent months.
Inflation remains close to the Bank’s 2% target.
The temporary suspension of the GST/HST lowered certain consumer prices, but the Consumer Price Index (CPI) in January rose slightly to 1.9%.
With the tax break ending, inflation is expected to rise to about 2.5% in March.
Shelter costs continue to be a key driver of inflation, and short-term inflation expectations have increased due to concerns over the impact of tariffs on prices.
Despite stronger-than-expected economic growth, ongoing uncertainty surrounding U.S. trade policy is affecting consumer confidence and business investment.
With inflation near the 2% target, the Bank’s Governing Council opted to lower the policy rate by 25 basis points.
While monetary policy cannot counteract the full effects of a trade war, the Bank aims to prevent rising costs from leading to sustained inflationary pressures.
The next interest rate decision is scheduled for April 16, 2025, when the Bank will release its updated Monetary Policy Report, including revised economic forecasts and risk assessments.
