The Bank of Canada has reduced its policy rate by 25 basis points to 3%, marking a key shift in its approach to the Canadian economy.
Governor Tiff Macklem addressed the rationale behind the decision. Macklem noted that inflation, which was 3% a year ago, has now remained close to the Bank’s target of 2%. “Inflation has remained close to 2%, and business and consumer expectations have largely normalized,” said Macklem. “There is no longer evidence of broad-based inflationary pressures.”
The decision to cut rates is also tied to the Bank’s broader economic forecast. According to the Bank’s January Monetary Policy Report (MPR), Canada’s GDP is expected to grow by 1.8% in 2025 and 2026, up from 1.3% in 2024. Despite this positive projection, business investment remains weak, and the labor market remains soft with an unemployment rate of 6.7%.
One of the central challenges facing the Canadian economy is the ongoing uncertainty around trade, particularly with the United States. Macklem discussed the potential impact of trade tariffs, noting the difficulty in predicting their exact effects. “We don’t know what new tariffs will be imposed, when, or how long they will last,” he explained. “A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada, while the higher cost of imported goods would put direct upward pressure on inflation.”
Although the Bank’s forecast assumes no new tariffs, Macklem acknowledged that a major trade conflict could derail the economic outlook. “If broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested,” he said.
In addition to the rate cut, the Bank of Canada is ending its quantitative tightening (QT) program. The BoC will restart asset purchases beginning in March 2025 to stabilize its balance sheet and ensure a gradual growth trajectory. “We are completing the normalization of our balance sheet,” said Rogers. “The Bank will restart asset purchases in early March, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy.”
Despite the global risks, there is cautious optimism about Canada’s economic recovery. Household spending, supported by lower borrowing costs, is expected to strengthen further. However, Macklem pointed out that business investment remains a challenge, and exports are being supported by new capacity for oil and gas.
While the labor market has improved somewhat, Macklem emphasized that it remains soft, with wage pressures showing signs of easing. “Job growth has strengthened in recent months, but the unemployment rate remains at 6.7%,” he said. “The labour market remains soft, but we are starting to see growth pick up.”
The BoC also highlighted risks related to the global economic environment, particularly the potential for trade disruptions. Macklem noted that the central bank would continue to monitor these risks closely, emphasizing the importance of being prepared for any major changes in the trade landscape.
With the rate cut and the end of QT, the Bank of Canada is positioning itself to respond to the evolving economic landscape. Macklem stressed that while the BoC has tools to manage economic challenges, it cannot offset the effects of a significant trade conflict. “Monetary policy cannot offset the economic consequences of a protracted trade conflict,” he said. “What we can do is help the economy adjust with inflation back around the 2% target.”
As for future decisions, Macklem indicated that the BoC will continue to assess the situation as developments unfold, with the next scheduled rate announcement set for March 12, 2025.