Bank of Canada Lowers Policy Rate by 25 Basis Points to 2.75%

Bank of Canada Lowers Policy Rate to 2.75% Amid Economic Uncertainty

The Bank of Canada has reduced its target for the overnight rate to 2.75%, with the Bank Rate at 3% and the deposit rate at 2.70%.

Canada’s economy entered 2025 in a strong position, with inflation near the 2% target and solid GDP growth. However, rising trade tensions and new U.S. tariffs are expected to slow economic activity and increase inflationary pressures. The economic outlook remains highly uncertain due to the rapidly shifting policy environment.

Global Economic Conditions

• The U.S. economy has shown signs of slowing, with inflation slightly above target.
• Eurozone growth was modest in late 2024.
• China’s economy has remained strong, supported by government policies.
• Financial markets have responded with falling equity prices and lower bond yields, reflecting expectations of weaker North American growth.
• Oil prices have been volatile, trading below projections in the Bank’s January Monetary Policy Report (MPR).
• The Canadian dollar remains stable against the U.S. dollar but has weakened against other currencies.

Domestic Economic Trends

• Canada’s GDP grew by 2.6% in Q4 2024, exceeding expectations from the January MPR.
• Past interest rate cuts have boosted economic activity, particularly in consumer spending and housing.
• However, growth is expected to slow in early 2025, as trade conflicts weigh on confidence and investment.
• Surveys indicate declining consumer confidence and reduced business spending, with companies delaying or canceling investments.
• Exports surged ahead of the tariff implementation, partially offsetting weaker domestic demand.

Labour Market & Inflation

• Employment growth was strong from November to January, bringing the unemployment rate down to 6.6%.
• In February, job growth stalled, with trade tensions threatening the labour market recovery.
• Wage growth has moderated, despite earlier strength.
• Inflation remains near 2%, though it is expected to rise to 2.5% in March as a temporary GST/HST suspension ends.
• Core inflation measures remain above 2%, primarily due to persistently high shelter costs.

Policy Decision & Outlook

Despite stronger-than-expected growth, policy uncertainty from shifting U.S. tariffs is dampening consumer and business confidence. Given this backdrop, and with inflation close to target, the Bank has lowered the policy rate by 25 basis points.

While monetary policy cannot eliminate the effects of a trade war, the Bank’s priority is to ensure that rising costs do not lead to sustained inflation. The Governing Council will carefully assess downward inflationary pressures from slowing growth and upward pressures from higher costs, while closely monitoring inflation expectations. The Bank remains committed to maintaining price stability for Canadians.