Interest rates were the central theme of 2024, and as we step into 2025, the Bank of Canada (BoC) is signaling a shift toward a more measured approach. After cutting the policy rate by a substantial 175 basis points throughout 2024, including two consecutive 50-basis-point cuts in October and December, the BoC has set the tone for gradual adjustments moving forward.
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With the policy rate now sitting at 3.25% — its lowest in over two years — economists, businesses, and consumers are speculating about what lies ahead.
Bank of Canada Announces Another Rate Cut and Updates Mortgage Rules
2024 Recap: Key Policy Shifts and Economic Performance
The BoC’s aggressive rate cuts last year were aimed at stimulating the economy, which showed resilience despite global headwinds. Governor Tiff Macklem highlighted this in a December press conference, noting:
“We have now cut our policy rate by a total of 175 basis points, bringing it from 5% down to three-and-a-quarter percent. That’s substantial.”
Macklem emphasized that further rate cuts would likely be more incremental, with Governing Council adopting a “more gradual approach” to avoid overheating the economy or exacerbating inflationary pressures.
Bank of Canada Reduces Key Interest Rate to 3.25%: Signals a Shift to Gradual Policy Adjustments
A Warning About Canadian Fixed Mortgage Rates: Why They May Rise Despite Bank of Canada Cuts
Bank of Canada Official Cautions Against Adjusting Mortgage Rules to Address Housing Affordability
Bank of Canada Executes Significant Rate Cut to Stimulate Job Growth
Bank of Canada Historic 3.75% Rate Cut: Key Impacts on Mortgages, Loans, and Savings 2024
Inflation Trends and the BoC’s Cautious Stance
Inflation remains a key factor in the BoC’s strategy. While headline CPI inflation has hovered around 2% since mid-2024, concerns linger over core inflation, which held steady at 2.7% in November.
Economists like Admir Kolaj of TD Bank pointed to the persistence of elevated core inflation and shorter-term trends suggesting upward pressure. In a December report, Kolaj noted:
“The three-month annualized change in core inflation pushed above 3%, and the less volatile six-month trend points to further upward pressure in 12-month core inflation ahead.”
These inflationary trends support a cautious approach to future rate cuts, even as economic growth remains steady.
Economic Indicators Show Resilience
Canada’s economy grew by 0.3% in October, following a 0.2% rise in September, with 12 of 20 industries recording growth. Indicators for retail, housing, and auto sales have been robust, contributing to positive GDP projections for 2024.
Economist Marc Ercolao noted that this resilience supports the expectation of a 25-basis-point cut at the BoC’s next policy meeting on January 29, 2025:
“Today’s data should assuage fears of excessive downside to Canadian growth in the near term.”
Diverging Forecasts: What Do Canada’s Big Five Banks Predict?
While the consensus among economists is for further rate cuts in 2025, the extent and timing remain subjects of debate:
- Scotiabank:
- Forecasts a 25-basis-point cut in the first quarter of 2025.
- Expects the policy rate to hold steady at 3.0% until the end of 2026.
- BMO:
- Anticipates the policy rate will reach 2.5% by mid-2025.
- Suggests the BoC could take an even more aggressive approach if economic conditions allow.
- CIBC:
- Projects the policy rate will drop by 25 basis points at each of the next four meetings, reaching 2.25%.
- Emphasizes the need for monetary stimulus to spur economic growth.
- RBC:
- The most dovish, predicting a cumulative 125-basis-point decrease by mid-2025, bringing the rate to 2.0%.
- Views this as a move into “stimulative” territory to accelerate growth.
The Role of External Factors in 2025
Economists are also considering external factors, such as:
- U.S. Monetary Policy Divergence: Growing divergence between Canadian and U.S. monetary policies could affect the Canadian dollar and trade dynamics.
- Tariff Threats: The potential for a 25% U.S. tariff on Canadian imports, championed by former U.S. President Donald Trump, looms as a major risk to exports and domestic demand.
GST/HST Relief Measures to Boost Early 2025 Activity
The GST/HST relief measures are expected to provide a short-term boost to economic activity in early 2025, pulling forward some spending that would otherwise occur later in the year. However, this temporary stimulus may also contribute to inflationary pressures, complicating the BoC’s task.
Looking Ahead: Key Dates and Expectations for 2025
The next interest rate announcement is scheduled for January 29, 2025, with economists widely expecting a 25-basis-point cut. The trajectory of rate cuts throughout the year will depend on inflation, economic growth, and external risks.
Governor Macklem and the Governing Council have signaled a cautious but proactive stance, balancing the need for economic stimulus with the risks of inflationary pressures.
As we enter 2025, the Bank of Canada is poised to take a more deliberate approach to monetary policy. While rate cuts are on the horizon, the pace and magnitude will depend on evolving economic conditions.
For Canadians, this means continued attention to inflation trends, housing affordability, and global economic developments as key drivers of monetary policy decisions in the year ahead.
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