The Bank of Canada Cuts Key Interest Rate by 25 bps

The Bank of Canada (BoC) lowered its overnight rate by 25 basis points to 3.0%, in line with market expectations. This decision widens the gap between the US Federal Funds rate and Canada's overnight rate to 150 basis points, driven by stronger US growth and inflation. As a result, the Canadian dollar has weakened against the US dollar, and oil prices have dropped.

The January Monetary Policy Report (MPR) highlights significant uncertainty in the global economy, particularly due to the potential impact of U.S. trade tariffs, which are not factored into the Bank’s baseline forecast. While Canada’s economy is showing signs of recovery with increased consumption and housing activity, the labor market remains soft, and business investment is still weak. The Bank of Canada has lowered its policy rate to stimulate growth, but the outlook remains uncertain due to the unpredictable scope and duration of a potential trade conflict, which could weaken GDP growth and increase inflation in Canada.

With inflation around 2% and the economy experiencing excess supply, the Governing Council has lowered the policy rate by 25 basis points to 3%, marking a total reduction of 200 basis points since last June. The expectation is that lower interest rates will stimulate household spending, and the outlook suggests the economy will gradually strengthen while inflation stays near the target. However, widespread and significant tariffs could pose a challenge to the resilience of Canada’s economy. To uphold its commitment to price stability for Canadians, the Bank will closely monitor these developments and assess their potential impact on economic activity, inflation, and monetary policy.

Chief economist Dr. Sherry Cooper anticipates that the Bank will keep lowering the policy rate by 25 basis points at a time, reaching 2.5% by this Spring, which will further strengthen the Canadian housing market. The next interest rate announcement by the Bank of Canada will be on March 12, so stay tuned for further updates!