The Bank of Canada today cut its overnight interest rate target to 2.75%, with the Bank Rate at 3% and the deposit rate at 2.70%.
The Canadian economy enters 2025 on a strong note, with inflation close to its 2% target and GDP growth buoyant. However, escalating trade tensions and tariffs imposed by the United States are expected to slow economic activity and increase inflationary pressures in Canada. The economic outlook remains more uncertain than usual due to a rapidly changing policy landscape.
After a period of strong growth, the US economy has now shown signs of slowing in recent months. US inflation remains slightly above target. Economic growth in the eurozone moderated in late 2024. The Chinese economy has been growing strongly, supported by government policy. Equity prices fell and bond yields declined on market expectations of weaker North American economic growth. Oil prices, meanwhile, remained volatile and traded below expectations in the Bank’s January Monetary Policy Report (MPR). The Canadian dollar was broadly unchanged against the US dollar but weaker against other currencies.
The Canadian economy grew by 2.6% in the fourth quarter of 2024 after an upwardly revised 2.2% growth in the third quarter. This growth trajectory is stronger than expected in the January MPR. Previous interest rate cuts have boosted economic activity, particularly in the consumption and housing sectors.
However, economic growth in the first quarter of 2025 is expected to slow as the escalating trade conflict weighs on business confidence and activity. Recent surveys show a sharp decline in consumer confidence and a slowdown in business spending as companies postpone or cancel investments. The negative impact of the slowdown in domestic demand was partly offset by a surge in exports before the tariffs were imposed.
Employment growth strengthened between November and January and the unemployment rate fell to 6.6%. However, in February, employment growth stalled. While previous interest rate cuts have boosted demand for labour in recent months, there are warning signs that rising trade tensions could derail the recovery in the labour market. Meanwhile, wage growth is showing signs of slowing.
Inflation remains close to the 2% target. The temporary suspension of the GST/HST has eased some consumer prices, but January CPI was slightly stronger than expected at 1.9%. Inflation is expected to rise to around 2.5% in March after the tax break ends. The Bank’s main measure of core inflation remains above 2%, mainly due to continued housing price inflation. Short-term inflation expectations have risen on concerns about the impact of tariffs on prices.
Monetary policy cannot offset the impact of the trade war. What it can and must do is ensure that rising prices do not lead to persistent inflation. The Governing Council will carefully assess the timing and strength of downward pressures on inflation from a weaker economy and upward pressures from higher costs. The Council will also closely monitor inflation expectations. The Bank is committed to maintaining price stability for Canadians.
