Bank of Canada Cuts Interest Rate to 2.75% Amid Economic Uncertainty
TORONTO – The Bank of Canada has lowered its target for the overnight rate to 2.75%, reducing the Bank Rate to 3% and the deposit rate to 2.70%. The decision, announced today, comes as Canada’s economy enters 2025 in a strong position but faces growing risks due to heightened trade tensions with the United States.
Inflation remains near the central bank’s 2% target, while GDP growth has been solid. However, tariffs imposed by the U.S. are expected to slow economic activity and contribute to inflationary pressures in Canada. The Bank of Canada noted that the economic outlook is marked by significant uncertainty due to the evolving global policy landscape.
In the U.S., economic growth appears to have slowed in recent months, while inflation remains slightly above target. In contrast, China’s economy has been expanding robustly due to government support measures. The euro zone saw modest growth in late 2024. Financial markets have reacted to expectations of weaker North American growth, with equity prices declining and bond yields easing. Oil prices have been volatile and are currently trading below the levels anticipated in the Bank’s January Monetary Policy Report. Meanwhile, the Canadian dollar remains stable against the U.S. dollar but has weakened relative to other currencies.
Canada’s economy grew by 2.6% in the fourth quarter of 2024, following an upward revision of third-quarter growth to 2.2%. This growth has been stronger than initially expected, aided by previous interest rate cuts that spurred consumer spending and housing activity. However, economic momentum is likely to slow in the first quarter of 2025 as trade tensions weigh on business and consumer confidence. Recent surveys suggest a notable drop in consumer confidence and a slowdown in business investment as companies delay or cancel projects. A surge in exports ahead of impending tariffs has helped offset some of these negative effects.
Employment data showed strength from November through January, with the unemployment rate falling to 6.6%. However, job growth stalled in February. The Bank of Canada warned that trade tensions could disrupt recent labour market improvements, even as wage growth shows signs of moderating.
Inflation remains close to the central bank’s 2% target. The temporary suspension of the GST/HST lowered some consumer prices, but January’s Consumer Price Index (CPI) came in at 1.9%, slightly higher than expected. With the tax break set to expire, inflation is projected to rise to approximately 2.5% in March. Core inflation measures remain above 2%, primarily due to persistent shelter price inflation. Short-term inflation expectations have also increased as concerns grow over the impact of tariffs on consumer prices.
The Bank of Canada emphasized that while monetary policy cannot fully counteract the effects of a trade war, it plays a critical role in preventing higher prices from fueling sustained inflation. The Governing Council’s decision to lower interest rates reflects a careful balancing act—assessing both downward pressures on inflation from slowing economic activity and upward pressures from rising costs. The central bank will closely monitor inflation expectations and remains committed to maintaining price stability for Canadians.
SOURCE The Bank of Canada
