Economists at Canada’s major banks predict a less dramatic shift in interest rates in 2025 compared to 2024. However, various economic factors are expected to create new challenges for Canadians and the broader economy.
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A Look Back at 2024: Significant Rate Cuts Defined the Year
In 2024, the Bank of Canada (BoC) implemented five rate cuts, lowering the overnight rate from 5% to 3.25%. The most notable move came on December 12, with a 50-basis-point cut, marking the final adjustment for the year. The BoC signaled a slowdown in the pace of cuts going forward, hinting at a more cautious approach to monetary policy.
Canada’s GDP: Recent Data and Economic Implications
Recent GDP data provided more context for economists to refine their 2025 forecasts.
- October Growth: Canada’s real GDP increased by 0.3%, driven largely by oil and gas extraction.
- November Decline: Preliminary estimates from Statistics Canada indicate a 0.1% drop in GDP for November.
While the October growth exceeded expectations, CIBC economist Andrew Grantham noted that fourth-quarter GDP might fall slightly below the BoC’s projected 2% growth.
What’s Next for Interest Rates?
Economists generally anticipate a 25-basis-point rate cut at the BoC’s January 29 policy meeting. However, upcoming data on the consumer price index (CPI) and employment will play a key role in shaping this decision.
Bank Projections for 2025
Economists from Canada’s leading banks have shared their outlooks for interest rates in 2025:
- BMO: The overnight rate could reach 2.5% by mid-2025.
- RBC: A target of 2% is expected, deemed sufficient to support economic growth and keep inflation near the BoC’s 2% target.
- CIBC & Desjardins: Both project a rate of 2.25% by the end of 2025.
Key Economic Concerns for 2025
Desjardins Group economist LJ Valencia highlighted three major factors that could weigh on Canada’s economy:
- Mortgage Renewal Challenges: Many mortgage holders are expected to face higher rates during renewals, reducing disposable income.
- Lower Population Growth: Recent immigration policies may slow population growth, impacting the economy.
- Tariff Uncertainty: U.S. President-elect Donald Trump has threatened new tariffs, which could further disrupt economic stability.
Challenges for the BoC: The Output Gap
National Bank economist Daren King emphasized the BoC’s challenge of addressing the output gap. To “absorb unused capacity,” the economy must operate above its long-term potential for an extended period. King noted that the economy is not yet at this point, underscoring the need for further rate cuts.
CIBC’s Grantham echoed this sentiment, pointing out that Canada’s GDP is not growing above its long-term potential — a critical factor in reducing unemployment and closing the output gap.
2025 Rate Cuts: What’s Next for the Bank of Canada and the Economy
Bank of Canada Announces Another Rate Cut and Updates Mortgage Rules
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
A More Gradual Path Ahead
While 2024 saw significant 50-basis-point rate cuts, 2025 is expected to follow a more gradual path. Economists agree that marginal rate relief is still necessary to support economic growth, even if dramatic cuts are a thing of the past.
As Canada navigates these challenges, all eyes will be on the BoC’s policy moves and their impact on Canadians’ financial well-being.
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