Bank of Canada Cuts Interest Rate to 3%
In its first announcement of 2025, the Bank notes uncertainty surrounding potential U.S. trade tariffs.
The Bank of Canada reduced its target for the overnight lending rate 25 basis points from 3.25% to 3%. Announced on Wednesday, January 29, 2025, the cut was widely expected by financial markets in the lead-up to the decision, marking the sixth rate reduction since the onset of the pandemic, bringing rates down 2% from where they stood in April 2024.
The Canadian economy has been picking up due to past interest rate cuts and increased activity in consumer spending. Housing is expected to reman strong. However, business investment and the labour market were noted by the Bank as soft spots in the economic landscape.
The Bank forecast Canadian Gross Domestic Product (GDP) growth of 1.8% in both 2025 and 2026 in its January 2025 Monetary Policy Report (MPR) but noted the effects of a trade war with the United States were impossible to predict and that these forecasts were provided as a baseline in the absence of any tariffs.
In its MPR, the Bank specifically noted regarding housing that lower mortgage rates and recent mortgage rule changes would strengthen resale activity, while pent-up demand for housing would be supportive for new home construction. However, growth in supply of new homes in the short term would be constrained by land availability, zoning issues, and a shortage of skilled workers.
The Bank observed underlying inflation is now close to its target of 2% and that it will remain around this target over the next two years. Should a trade war emerge with Canada’s largest trading partner, the United States, the Bank noted “a protracted trade conflict would most likely lead to weaker GDP and higher prices in Canada.”
The Bank replaced its wording surrounding the need for further evaluation of rate reductions with a more stable overview, noting that its cumulative rate reductions have been substantial, but again reiterated the uncertainty surrounding potential tariffs from the U.S. In its MPR the Bank stated, “in the face of a trade conflict, the response of monetary policy must balance the downward pressure on inflation from excess supply in the economy with the upward pressure on inflation from new tariffs on imports.”
The Bank of Canada will make its next scheduled interest rate announcement on March 12 and publish its full outlook for the economy and inflation in its next Monetary Policy Report on April 16.
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