On January 29, 2025, the Bank of Canada (BoC) is set to hold its first interest rate announcement of the year, with widespread expectations pointing toward another cut. Economists from various institutions remain cautiously optimistic, with many predicting a 25-basis-point reduction from the current rate of 3.25%. This anticipation arises as the Canadian economy grapples with mixed indicators of growth, alongside looming external pressures, particularly from recent tariff threats from the U.S.
The year 2024 saw significant rate reductions, with the BoC implementing five cuts across multiple meetings, including two consecutive 50-basis-point reductions late last year. The current economic climate presents both challenges and opportunities, as Canada faces the dual threats of inflationary pressures and international trade tensions. The inflation rate had dipped to 1.8% by December 2024, aligning with the BoC's target range and signaling notable economic recovery.
Economists such as James Orlando from TD highlighted the necessity of maintaining caution amid the monetary policy changes. He noted, “Given where interest rates are in Canada right now, we think the BoC can go a little bit slower with its cuts.” This statement reflects a collective sentiment among analysts as they assess whether the BoC’s previous easing measures have laid sufficient groundwork for recovery.
Adding complexity to the situation is the distressing external risk posed by U.S. tariff threats on Canadian goods, which are rumored to take effect on February 1, 2025, should President Trump act on them. This potential implementation could seriously strain Canada's trade relations with its most significant partner. Frances Donald from Manulife remarked, “The two economic stories are becoming very different... I think we'll spend a lot of time talking about how Canada's economy has fundamentally and maybe permanently shifted away from the US model.” Such shifts could influence the BoC's rate decisions, making the forthcoming announcement even more pivotal.
According to Leslie Preston from TD, the BoC closely monitors core inflation rather than just headline metrics. December's inflation data, which aligned closely with the BoC’s expectations, illustrated improvements, yet core inflation crept up to 2.5%, above the desired mark. Preston elaborated, “December's inflation data came in line with the Bank of Canada's expectations for inflation to average close to 2%,” emphasizing the need for caution as core pressures continue to mount.
Further insights have indicated varying expectations among Canada's largest financial institutions. RBC forecasts suggest the BoC will adopt gradually paced adjustments, with predictions set for a 25-basis-point cut, potentially moving the rate to 2%. Economists Nathan Janzen and Claire Fan noted the recent GDP growth data and mixed employment reports create uncertainty, stating, “Labour markets are still soft enough to argue more interest rate cuts are needed for the economy to rebound sufficiently to prevent inflation from undershooting the 2% target.”
CIBC economist Andrew Grantham painted a complex picture, observing early signs of economic growth alongside the looming threats of tariffs. Grantham elaborated, “We think the green shoots of economic acceleration are small enough, and the storm clouds from potential tariffs dark enough, to justify a... 25 bps interest rate cut.” He emphasized the significance of tariffs within the economic equation, warning of the potential inflationary consequences and their subsequent impact on consumer spending and overall economic activity.
On the other hand, Douglas Porter of BMO discussed the opposition to cutting rates based on the risk management perspective. Porter stated, “These are clearly not normal times,” addressing both the risks and opportunities presented to the bank. He also underscored the importance of assessing the situation rather than making impulsive movements. His analysis suggested caution amid numerous economic indicators trending positively, including retail sales rising by 1.6% amid holiday spending.
The rising threat of tariffs poses notable risks to Canadian households and businesses alike. It could lead to increased borrowing costs and affect financial planning for many. With mortgage renewals approaching for several households, any decision made by the BoC will carry substantial repercussions. On a broader scope, business access to credit is also likely to be significantly influenced, shaping growth trajectories across various sectors of the economy.
Concluding the analysis of the upcoming BoC decision, January 29 will mark not only the beginning of the new year’s monetary policy but also resonates as a pivotal juncture for the Canadian economy. The scenario reflects cautious optimism—many experts believe previous easing efforts have set the stage for recovery. Yet, uncertainty surrounding U.S. relations and tariff commitments creates layers of complexity for policymakers. One thing remains clear: how the BoC navigates this multifaceted economic environment will influence both immediate conditions and long-term prospects for Canada’s broad economic framework.