Bank of Canada Lowers Interest Rates, Outlook Reflects Uncertainty Amid U.S. Trade Risks
January 29, 2025The Bank of Canada has reduced its target for the overnight rate to 3%, signaling its commitment to supporting economic growth. The decision also marks the end of quantitative tightening, with plans to restart asset purchases in March to stabilize and modestly grow its balance sheet in line with economic expansion.
The Bank’s January Monetary Policy Report (MPR) comes with significant uncertainty, primarily due to the unpredictable impact of potential U.S. trade tariffs under the new administration. Without new tariffs, global economic growth is expected to remain around 3% in 2024 and 2025. While the U.S. economy benefits from stronger consumption, growth in the euro area is subdued, and China faces ongoing structural challenges.
In Canada, recent interest rate cuts are stimulating consumption and housing activity, although business investment remains weak. Employment has improved, with the unemployment rate at 6.7% in December, and wage pressures have shown signs of easing. The Bank forecasts GDP growth of 1.3% in 2024, with a gradual strengthening to 1.8% in 2025 and 2026.
Inflation remains close to the 2% target, despite some volatility. The Bank expects this trend to continue, barring the impact of potential trade conflicts. With inflation under control and economic activity gradually strengthening, the Bank of Canada is focused on maintaining price stability and monitoring the risks posed by U.S. trade policies.