The Bank of Canada opened its monetary policy playbook for 2025 with a 0.25% reduction in its overnight rate. The 6th since June of last year.

In issuing its January Monetary Policy Report, the Bank also noted that its projections are subject to “more-than-usual uncertainty” because of the rapidly evolving policy landscape, particularly the threat of trade tariffs by the new administration in the United States.

Below, we summarize the Bank’s commentary.

Canadian economic performance and housing

• Past interest rate reductions have started to boost the Canadian economy
• Recent strengthening in both consumption and housing activity is expected to continue
• Business investment, however, remains weak
• The outlook for exports is supported by new export capacity for oil and gas

Canadian inflation and outlook

• Inflation measured by the Consumer Price Index (CPI) remains close to 2%, with some volatility due to the temporary suspension of the GST/HST on some consumer products
• Shelter price inflation is still elevated but it is easing gradually, as expected
• A broad range of indicators, including surveys of inflation expectations and the distribution of price changes among components of the CPI, suggest that underlying inflation is close to 2%
• The Bank forecasts CPI inflation will be around the 2% target over the next two years

Canadian labour market

• Canada’s labour market remains soft, with the unemployment rate at 6.7% in December
• Job growth, however, has strengthened in recent months, after lagging growth in the labour force for more than a year
• Wage pressures, which have proven sticky, are showing some signs of easing

Global economic performance, bond yields and the Canadian dollar

• The global economy is expected to continue growing by about 3% over the next two years
• Growth in the United States has been revised upward, mainly due to stronger consumption
• Growth in the euro area is likely to be subdued as the region copes with competitiveness pressures
• In China, recent policy actions are boosting demand and supporting near-term growth, although structural challenges remain
• Since October, financial conditions have diverged across countries with bond yields rising in the US, supported by strong growth and more persistent inflation, and bond yields in Canada down slightly
• The Canadian dollar has depreciated materially against the US dollar, largely reflecting trade uncertainty and broader strength in the US currency
• Oil prices have been volatile and in recent weeks have been about $5 higher than was assumed in the Bank’s October Monetary Policy Report

Other comments

The Bank also announced its plan to complete the normalization of its balance sheet, which puts an end to quantitative tightening. The Bank said it will restart asset purchases in early March 2025, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy.

It also offered further rationale for today’s decisions by saying that with inflation around 2% and the economy in excess supply, the Bank’s Governing Council decided to reduce its policy rate. It also noted that cumulative reduction in the policy rate since last June is “substantial.” Lower interest rates are boosting household spending and, in the outlook it published (see below), the economy is expected to strengthen gradually and inflation to stay close to target.

Outlook

In today’s announcement, the Bank laid out its forecast for Canadian GDP growth to strengthen in 2025. However, it was quick to also point out that with slower population growth because of reduced immigration targets, both GDP and potential growth will be “more moderate” than what the Bank previously forecast in October 2024.

To put numbers on that forecast, the Bank now projects GDP will grow by 1.8% in both 2025 and 2026.  As a result, excess supply in the Canadian economy is expected to be “gradually absorbed” over the Bank’s projection horizon.

Setting aside threatened US tariffs, the Bank reasons that the upside and downside risks in its outlook are “reasonably balanced.” However, it also acknowledged that a protracted trade conflict would most likely lead to weaker GDP and higher prices in Canada and test the resilience of Canada’s economy.

The Bank ended its statement with its usual refrain: it is committed to maintaining price stability for Canadians.

2025 will bring more BoC news

The Bank is scheduled to make its second policy interest rate decision of 2025 on March 12^th. I will provide an executive summary immediately following that announcement.