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Canada Monetary Policy January 2025

Canada: Bank of Canada decreases rates in January

Latest bank decision: At its meeting on 29 January, the Bank of Canada reduced its target for the overnight rate to 3.00% from 3.25%, taking total rate cuts in the current cycle to 200 basis points.

Monetary policy drivers: The decision to ease monetary policy was driven by inflation which is close to the Bank’s 2.0% target, excess supply in the economy, and a soft labor market. That said, the rate cut was milder than the 50 basis-point cuts at the prior two meetings, as the Bank judged that past monetary loosening is already supporting economic activity.

Policy outlook: The Bank did not provide specific forward guidance. Our Consensus is currently for around 50 basis points of further rate cuts later this year. The Bank mentioned U.S. tariffs as a risk to the outlook: The imposition of significant tariffs could lead to additional interest rate cuts to support the economy.

Panelist insight: TD Economics’ James Orlando said:

“Canada exports $1.9 billion daily in goods and services south of the border. This sums to around 20% of Canada’s economy, with nearly two million jobs dependent on U.S. trade. We are still hopeful that tariff threats are more of a negotiation tactic, meaning they would be temporary and carry less long term impacts. Yet, this is a tail risk that remains front and center in the mind of the BoC. Our baseline forecasts remains that the BoC will cut rates to 2.25% by year-end, but should 25% tariffs come into play for more than a few months, we’d expect the central bank to cut more aggressively in order to cushion the economy.”

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