On March 12, 2025, the Bank of Canada reduced its target for the overnight interest rate to 2.75%. The Bank Rate now stands at 3.00%, and the deposit rate is 2.70%.
Key Economic Updates:
- As of early 2025, Canada’s economy was performing well, with GDP growth remaining strong and inflation close to the 2% target.
- However, recent tariffs and trade tensions introduced by the United States are expected to slow future economic activity and add inflationary pressure in Canada.
- The overall economic outlook is uncertain, largely due to the unpredictable nature of global trade policy changes.
Global Economic Context:
- U.S. economic growth has slowed in recent months, with inflation remaining slightly above its target.
- The euro zone saw modest growth at the end of 2024.
- China’s economy has continued to grow, supported by domestic policy measures.
- Global equity markets have declined, and bond yields have decreased as markets adjust expectations for slower growth.
- Oil prices remain volatile and are trading below earlier projections.
- The Canadian dollar is stable against the U.S. dollar but has weakened relative to other currencies.
Domestic Economic Performance:
- Canada’s Q4 2024 GDP grew by 2.6%, following a revised 2.2% increase in Q3—stronger than what was anticipated in the Bank’s January Monetary Policy Report.
- Past interest rate cuts have stimulated consumer spending and housing activity.
- Growth is expected to slow in Q1 2025 due to the effects of the escalating trade dispute, which has led to declining consumer confidence and postponed business investments.
- A temporary surge in exports ahead of tariff enforcement helped offset some of the slowdown in domestic demand.
Labour Market & Inflation:
- Employment increased from November to January, bringing the unemployment rate down to 6.6%.
- Job growth stalled in February, with businesses showing signs of hesitation in hiring due to trade-related uncertainty.
- Wage growth is beginning to moderate.
- Inflation remains near target, with January’s Consumer Price Index (CPI) at 1.9%. With the end of a temporary GST/HST suspension, inflation is expected to rise to about 2.5% in March.
- Shelter costs continue to push core inflation measures slightly above 2%.
Why the Rate Was Lowered:
Although recent economic performance has been stronger than expected, uncertainty from U.S. trade policy is impacting consumer and business confidence. With inflation close to the Bank’s 2% target, the Governing Council lowered the policy rate by 25 basis points on March 12.
While monetary policy cannot resolve trade-related issues, the Bank is taking steps to ensure short-term price increases do not lead to long-term inflation. It will continue to assess both downward pressures from weaker growth and upward pressures from higher costs.
What’s Next:
The Bank of Canada will release its next interest rate announcement and updated economic outlook on April 16, 2025, alongside the Monetary Policy Report (MPR).
