The Bank of Canada Lowers Policy Rate Again

Cutting Through Uncertainty: The Bank of Canada Lowers Policy Rate Again

The Bank of Canada (BoC) has made another move to ease economic pressures, cutting its policy rate by 0.25 percentage points to 3%—the lowest level since September 2022. This decision, while anticipated by the markets, reflects a broader effort to navigate economic uncertainty, inflation control, and external pressures.

Why the Cut?

Several factors influenced the BoC’s decision, including:

• Lingering Inflation Pressures – While core inflation remains a concern, overall inflation is close to the 2% target.

• Economic Slack – With elevated unemployment and excess supply, the economy has room to grow.

• Easing Wage Growth – Slower wage increases reduce the risk of sustained inflation.

• Tariff Uncertainty – Potential U.S. tariffs and Canadian countertariffs add downside risks to growth.

Economic Projections and Tariff Risks

The BoC also released updated forecasts, projecting GDP growth at 1.8% for both 2025 and 2026—down from its previous estimates of 2.1% and 2.3%. This revision reflects lower federal immigration targets and an overall slowdown in business investment. While lower interest rates are expected to support housing and consumption, concerns over export growth persist.

A key risk highlighted in the report is the potential impact of tariffs. A broad-based 25% U.S. tariff, combined with Canadian countertariffs, could reduce GDP growth by 2.5 percentage points in the first year and 1.5 points in the second year. While these tariffs are not yet implemented, the uncertainty alone is already affecting investment decisions.

How Does This Compare to the U.S.?

The BoC’s decision comes as the U.S. Federal Reserve is expected to keep its rates steady at 4.25-4.5%, given the stronger U.S. economy and persistent inflation concerns. The divergence in policy rates underscores the unique economic challenges facing Canada, including external trade pressures and domestic economic softness.

What’s Next?

The BoC signaled that future rate decisions will depend on developments in the U.S. and evolving economic conditions. If tariffs are imposed, the Bank may need to cut rates further—potentially bringing the policy rate down to 2% by mid-year. However, countertariffs from Canada could complicate matters, increasing inflationary pressures and prompting the BoC to pause its rate-cutting cycle.

A Recap of Recent Rate Cuts

The current easing cycle began in the spring of 2024, with gradual cuts throughout the year:

• April: The BoC signaled confidence in inflation progress but held off on cuts.

• June: Inflation eased further, leading to a 0.25 percentage point cut.

• July-September: With economic slowdown concerns, the Bank cut rates twice.

• October: Inflation fell below 2%, prompting a larger 0.5 percentage point cut.

• December: With inflation still at target, another 0.5 percentage point cut followed.

Final Thoughts

The BoC is clearly prioritizing economic growth and stability, but uncertainty remains high. Markets and policymakers alike will closely watch economic data, inflation trends, and trade developments in the coming months. For now, lower interest rates may provide relief for borrowers and stimulate economic activity, but risks—especially from tariffs—loom large.

Stay tuned for further updates as the economic landscape evolves.