Canadians are bracing for the Bank of Canada (BoC) to make its first interest rate update of 2025 on January 29, with many expecting another cut. Following the final major rate reduction of 2024 on December 11, which saw the key interest rate drop from 3.75 percent to 3.25 percent, economic uncertainty looms large. The BoC's decision will address the current economic climate shaped by rising unemployment and potential trade tensions with the United States.
The unemployment rate surged to 6.8 percent, marking its highest point since just after the pandemic's peak years, according to various reports. Experts had initially predicted just a 0.25 percent cut, but increased economic concerns shifted perspectives. Economists warn of the potential impact of proposed tariffs by U.S. President Donald Trump, which could have dire consequences for Canada's economy.
Penelope Graham, mortgage expert at Ratehub.ca, noted, "A second Trump presidential term – and potential trade war – has injected uncertainty..." This backdrop suggests turbulence as the BoC approaches its January meeting. Graham elaborated, saying 2025 looks like "another wild economic ride" with the only constant expected to be upheaval and the shaping of mortgage trends.
With inflation slowing to 1.8 percent based on the latest Consumer Price Index (CPI), some see room for more cuts. Graham observed, "Despite previous signals... tariff uncertainty... should prompt another quarter-point rate cut in the upcoming January rate announcement." Should they go forward with the cut, she explained it’s likely aimed at building economic resilience against looming recession threats.
The alternate nature of BoC announcements means this meeting will feature detailed commentary on monetary policy, not only the interest rate cut. Analysts plan to dissect the language used for cues about future monetary pathways. "The language used may offer hints as to whether the Governing Council still believes the approach to rate cuts will be moderate..." Graham added.
Economic sentiment is proceeding cautiously, as reflected by RBC economist Claire Fan. During her interview with BNN Bloomberg, she stated recent rate cuts support economic activity, making it easier for Canadians to manage their finances. "Rate cuts from the Bank of Canada... continue to trickle through to support economic activity," Fan explained, emphasizing the need for sustained easing of monetary policy.
This perceived easing aligns with the BoC's recent pattern as it previously cut rates five consecutive times last year from 5.00 percent to 3.25 percent. The threat of tariffs and the fluctuacy of the Canadian bond market has investors on edge, with Graham noting, "Canada's five-year yield has swung... which may put downward pressure on fixed mortgage rates." This volatility complicates decisions for prospective home buyers.
Challenging circumstances often lead homebuyers to seek stability through pre-approvals and locking rates early. The hypothetical situation of Maha, who recently acquired a home at the average Canadian price, exemplifies these trends: had the BoC cut rates, her monthly mortgage payment would noticeably decrease, illustrating broader financial impacts on Canadians.
Meanwhile, retail sales figures from Statistics Canada reflected cautious spending behavior as holiday shopping delays led to significant December rebound spending. Economists like Fan surmised this behavior was prompted by recent tax holidays, influencing consumer habits toward later purchases. "There was some amount of nudging holiday shopping... because of the GST holiday," she remarked, indicating broader trends affecting overall economic activity.
While some observers predict continuous rate cuts, there are questions about longer-term stability. Dustin Reid from Mackenzie Investments summarized the analysis, stating, "The Bank of Canada is likely to cut by another 25 basis points..." as it battles sluggish growth and inflation trends. Yet concerns linger about Trump’s threatening tariffs and how they might conglomerate with domestic challenges.
Overall forecasts seem promising, yet uncertainties surrounding economic conditions persist as the threat of tariffs clouds the outlook. "The recent pickup... could justify a pause from the Bank of Canada next week," said Thomas Ryan from Capital Economics. Clarity is sorely needed on the extent of trade disruptions and how they might alter the interest rate dynamics set forth by the BoC.
Frances Donald warned against short-term inflationary impacts due to tariffs: "Tariffs tend to increase costs, which is inflationary, but also weaken an economy, which is deflationary." The upcoming Bank of Canada meetings will shape these conversations significantly, with experts eagerly waiting for the central bank's final decisions.
With heightened vigilance over how the BoC will navigate future monetary policy, stakeholders look toward the March meeting as the potential point of more significant change. For now, all eyes remain on how the January updates will impact Canadian households and their economic trajectories.