On Wednesday morning, the Bank of Canada announced an interest rate cut of 25 basis points for their January decision — the first of eight scheduled for 2025 — bringing the policy rate down to a tidy 3%. This is the lowest the benchmark rate has been since the early days of September 2022.
Wednesday’s quarter-point cut is in line with recent Bank of Canada messaging that Governing Council will be taking a more “gradual approach” to monetary policy, after delivering back-to-back 50-bps cuts in both October and December.
“With inflation around 2% and the economy in excess supply, Governing Council decided to reduce the policy rate a further 25 basis points to 3%," the BoC said in a statement. "The cumulative reduction in the policy rate since last June is substantial. Lower interest rates are boosting household spending and, in the outlook published today, the economy is expected to strengthen gradually and inflation to stay close to target. However, if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested. We will be following developments closely and assessing the implications for economic activity, inflation and monetary policy in Canada. The Bank is committed to maintaining price stability for Canadians."
Economists with Canada’s ‘Big Five’ banks were largely forecasting a cut of 25 bps leading up to this week’s decision (and in fact, they were largely forecasting the same before breaking for the holidays in December), but the economic climate over the past month has been turbulent enough to spur a fresh wave of speculation. The variable that has been on everyone’s lips is (recently re-minted) US President Trump’s continued threat of a 25% tariff on all Canadian goods, which could go into effect as soon as February 1st.
With that quasi-deadline just three days away from the rate announcement, the consensus, leading up to today was that the threat of a tariff made a stronger case for a quarter-point cut this week. In particular, BMO Economist Douglas Porter said in a note from Friday that “the Bank should likely be cutting simply from a risk-management perspective.”
“[…] these are clearly not normal times,” he said. “With the Canadian economy facing a possible massive shock from U.S. tariffs, the Bank should likely be cutting simply from a risk-management perspective. Even if the tariff threat is hollow — which may indeed be the case — the now deep uncertainty of US/Canada trade relations will likely put an icy chill into business capital spending plans, at least for any firm that exports.”
That said, the long-term the forecast, with tariffs in mind, is fuzzy. For one, Scotiabank’s Derek Holt, who has expressed his aversion to rate cuts in general, said on Friday that Trump’s tariffs, if realized, could incite rate hikes down the line. To back this up, he referenced the July 2019 Monetary Policy Report published the last time Trump sparked speculation of tariffs.
That report warned that inflation could drift higher (and persist higher for longer) under a 25% tariff scenario, combined with a weaker Canadian dollar and lower productivity. “This pressure is only partially offset by weaker aggregate demand,” it also noted.
While the 2019 report doesn’t get into how the policy rate would respond in this turn of events, Holt surmises that the inflationary pressure could prevent the Bank of Canada from further easing. “It may — and probably would — come to drive further policy tightening,” he added.
In any case, the Bank's forthcoming press conference and latest Monetary Policy Report are expected to be telling in terms of the central bank’s rationale for this rate decision and outlook going forward.
The next interest rate decision is scheduled for Wednesday, March 12, 2025. A full 2025 schedule can be found here.
