Two Announcements, Two Cuts to Start 2025

The Bank of Canada Cuts 25 Basis Points in its second announcement of the year.

• The Bank of Canada lowered its target for the overnight rate to 2.75 per cent, the Bank rate to 3.00 per cent, and the deposit rate to 2.70 per cent.
• Canada’s labour market remains sluggish. The delayed effects of monetary policy are keeping the unemployment rate in the mid-six per cent range. The latest labour force survey reported a 6.6 per cent unemployment rate in February 2025, with job growth essentially flat.
• Tariff concerns are driving currency volatility. Since Donald Trump’s election victory, tariffs on Canadian goods have been a heightened source of uncertainty. The CAD/USD exchange has been unstable, and that is set to continue as April 2 is set as the next tariff implementation date.
• The trade dispute with the Americans has weighed on consumers and businesses, postponing or outright cancelling investments, causing a slowdown in domestic demand. However, fears of tariffs have led importers of Canadian goods to build up inventory, resulting in a rise in Canadian exports.
• CPI inflation is steady near 2.0 per cent, but recent drops are partly artificial due to a temporary GST/HST break on select consumer goods and food services. Shelter price inflation is easing but remains above historical trends, hovering in the mid-four per cent range. As a result, the Bank of Canada’s preferred measure of Core CPI inflation remains above 2.0 per cent.

Insights

Tariffs, tariffs, tariffs. The Trump administration’s persistent tariff threats are adding uncertainty to Canada’s economic outlook, encouraging the Central Bank to cut its policy interest rate today. Broad U.S. tariffs would further devalue the Canadian dollar, raising concerns about stagflation—low economic growth and high inflation. In this scenario, the Bank of Canada’s tools are limited. Higher interest rates would tame high inflation but will further slow economic growth, while lower interest rates will lead to more spending but fuel inflation.

Another cut also signals the battle with inflation is nearly over. With the overnight rate at its lowest since the summer of 2022 and inflation coming in at 2.5 per cent or lower since July 2024, the Bank of Canada is on track to hit its 2.0 per cent target. Our latest national forecast expects inflation to stay within the 1 to 3 per cent target range, though base year effects will cause some volatility in the fourth quarter of 2025 and first quarter of 2026 due to the temporary GST/HST cut a year prior.

Lower interest rates will provide relief as population growth slows, and businesses look for encouragement. For the past three years, population growth has driven economic growth in Canada, while real GDP per capita has trended downward. Beginning in 2025, the opposite will happen. Lower immigration targets will considerably reduce population growth, but lower borrowing costs will provide a boost to spending. Another rate cut also provides a shred of optimism for firms during this difficult period. In addition to uncertainty surrounding global trade policies, business investment in Canada has been unable to sustain any momentum in recent years, an issue which has been exacerbated by higher interest rates.