What the Bank did
The Bank of Canada lowered its overnight rate target to 3% — that's a quarter of a percent cut. The Bank Rate is now 3.25%, and the deposit rate 2.95%. At the same time, the Bank announced it's ending quantitative tightening (the process of shrinking its balance sheet). It'll start buying assets again in early March, gradually, so the balance sheet stabilizes and then grows a bit as the economy does.
The tariff shadow over the forecast
The January Monetary Policy Report came with a caveat: more uncertainty than usual. The new US administration has threatened trade tariffs, but no one knows their scope or how long they'd last. So the baseline forecast assumes no new tariffs. If a trade conflict does arrive, the Bank says Canada would likely see weaker GDP and higher prices.
Global backdrop
The global economy is expected to keep growing at about 3% over the next two years. US growth got revised up, mostly because consumption is stronger. Europe faces subdued growth and competitiveness pressure. China's recent policy moves are helping near-term demand, though structural challenges remain.
Financial conditions have split: US bond yields rose on strong growth and sticky inflation, while Canadian yields dipped slightly. The Canadian dollar has weakened materially against the US dollar, driven by trade uncertainty and broad US dollar strength. Oil prices have been volatile — they're about five dollars higher than the Bank assumed in October.
What's happening in Canada
Past rate cuts are starting to work. You're seeing it in consumption and housing activity, and that momentum is expected to continue. Business investment, though, remains weak. On the export side, new capacity for oil and gas is helping the outlook.
The labour market is still soft. Unemployment was 6.7% in December. Job growth picked up in recent months after lagging labour-force growth for over a year. Wage pressures — which had been sticky — are showing some signs of easing.
The growth forecast
The Bank expects GDP growth to strengthen in 2025. But lower immigration targets mean slower population growth, so both GDP and potential growth will be more moderate than expected in October. After 1.3% growth in 2024, the Bank now projects 1.8% in both 2025 and 2026 — a bit above potential. That means excess supply in the economy gets absorbed gradually over the next couple of years.
Inflation near target
CPI inflation is close to 2%, with some month-to-month bouncing around because of the temporary GST/HST suspension on certain products. Shelter inflation is still elevated but easing gradually, as expected. A range of indicators — surveys of what people expect inflation to be, the spread of price changes across different product categories — suggest underlying inflation is near 2%. The Bank forecasts inflation will stay around the 2% target over the next two years.
Risk balance
If you set aside the tariff threat, upside and downside risks look reasonably balanced. But if a protracted trade conflict does unfold, the MPR notes it would most likely mean weaker GDP and higher prices in Canada.
Why the cut
With inflation around 2% and the economy running below capacity, the Governing Council decided to cut the policy rate by another quarter percent to 3%. That brings the cumulative reduction since last June to a substantial amount. Lower rates are boosting your household spending, and the outlook sees the economy strengthening gradually with inflation near target. But if broad and significant tariffs land, Canada's economic resilience will be tested. The Bank is watching closely and will assess what it means for activity, inflation, and monetary policy. Its commitment: maintaining price stability for you.
What to watch next
The next rate announcement is March 12, 2025. The Bank's next full economic and inflation outlook, including risks, arrives in the April 16 Monetary Policy Report. If you're renewing or shopping for a mortgage, the gap between now and then matters — your rate and your options depend on what the market does with this signal, not just what the Bank says in March.
