The Bank of Canada cut interest rates by 0.25%, reducing its benchmark overnight rate to 3%, with the Bank Rate at 3.25% and the deposit rate at 2.95% on Wednesday.
The threat of American tariffs against Canadian goods loomed over the announcement.
Bank of Canada Governor Tiff Macklem told reporters that the dollar’s recent depreciation has been primarily driven by “trade uncertainty and particularly President Trump’s threats to impose 25% tariffs on Canadian exports … if you look at the timing of the depreciation, it follows very closely on President Trump’s threats.”
“You look out the window and the threat of tariffs is there. There’s no doubt that weighed on our decision,” said Macklem. “The more we can get the economy on a solid footing before it faces new tariffs the better. From that risk management perspective, that reinforced the decision to cut the policy rate by 25 basis points.”
The bank said the “resilience of Canada’s economy would be tested” if tariffs are imposed.
The Bank of Canada also announced the normalization of its balance sheet and that it would end its practice of quantitative tightening.
“The Bank will restart asset purchases in early March, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy,” it said.
However, the bank noted that projections in the January Monetary Policy Report were made with heightened uncertainty due to the threat of U.S. trade tariffs, calling the MPR a baseline forecast.
The Bank of Canada noted how its previous rate boosted the economy and that consumption and housing activity are expected to continue to grow but that business investment remains weak.
“Canada’s labour market remains soft, with the unemployment rate at 6.7% in December,” reads the central bank’s statement. “Job growth has strengthened in recent months, after lagging growth in the labour force for more than a year. Wage pressures, which have proven sticky, are showing some signs of easing.”
It expects Canada’s GDP growth to strengthen this year but may be more moderate than anticipated due to population growth beginning to slow and a reduction in immigration targets.
“Following growth of 1.3% in 2024, the Bank now projects GDP will grow by 1.8% in both 2025 and 2026, somewhat higher than potential growth,” it said. “As a result, excess supply in the economy is gradually absorbed over the projection horizon.”
Consumer Price Index inflation continued to hover around 2%, with “some volatility due to the temporary suspension of the GST/HST on some consumer products.”
Shelter price inflation remains high but has been easing gradually.
The central bank forecasts that CPI inflation will stay around the 2% target over the next two years.
The Bank of Canada also announced an adjustment to the deposit rate.
“Effective January 30, the deposit rate will be set at a spread of 5bps below the Bank’s policy interest rate,” it said. “This change to the monetary policy implementation framework is being made to improve its effectiveness. The intent of this change is to improve the circulation of settlement balances as they decline towards steady state levels over the coming months and support the functioning of short-term funding markets.”
The central bank believes this adjustment will also help relieve some of the “upward pressure that has been seen on the overnight rate relative to the Bank’s target rate” and reinforce the effect of the Bank’s Overnight Repo operations.
