In line with what we anticipated in our Bank of Canada (BOC) Event Guide, the Bank of Canada has once again lowered interest rates by 25 basis points, bringing the rate down to 3.0%. This marks the sixth sequential rate cut since June 2024.
The BOC didn’t just stop there; they officially wrapped up their quantitative tightening program. However, they did caution that potential U.S. trade tariffs pose significant risks moving forward.
With this rate adjustment, the BOC has laid out plans to reinitiate asset purchases starting in March. They will initially engage in C$2-5 billion of term repo operations, with plans to resume Treasury bill acquisitions later in the year as part of their strategy to normalize the balance sheet.
Growth & Labor Market
In their latest quarterly Monetary Policy Report (MPR), the BOC revised GDP growth predictions, expecting an uptick from 1.3% in 2024 to 1.8% in both 2025 and 2026. This forecast, however, has been adjusted downward due to slower-than-expected population growth and lower immigration targets.
The labor market, they noted, is still quite sluggish, with unemployment lingering at 6.7% as of December. While job creation has picked up after trailing labor force growth for over a year, wage pressures, though persistent, have started to ease. Specifically, private-sector wage growth dipped to 3.4% from 4.6% since October.
Inflation & Policy Stance
Inflation has hovered around the 2% target since August, and the BOC believes it will maintain this level through 2025-26, notwithstanding short-term fluctuations due to the GST/HST holiday. Although the bank’s favored core inflation metrics (CPI-median and CPI-trim) are slightly above target at 2.4% and 2.5%, a gentle decline is expected as shelter-related inflation wanes.
Trade Risks
The anticipated tariff announcement from President Trump on February 1st remains a major unknown. The most recent MPR from the BOC flags broad-based 25% tariffs on Canadian goods as a potential drag on GDP growth and a possible catalyst for higher inflation, complicating policy decisions. The central bank faces the tricky task of managing inflation risks from excessive supply against rising import costs.
During his press conference, BOC Governor Tiff Macklem zeroed in on three crucial points:
- Inflation is steadying.
- Previous rate reductions are stimulating the economy.
- U.S. trade policy is still a significant wild card.
With inflation stabilized and interest rates substantially lower, the BOC’s monetary approach is now in a stronger position to aid economic shifts. However, Macklem did caution that broad U.S. tariffs might strain Canada’s economic resilience.
Market Reactions
In early trading, the Canadian Dollar (CAD) dipped but made a remarkable comeback just before the BOC’s announcement. However, the bank’s dovish position and Macklem’s emphasis on U.S. trade concerns during his press conference intensified bearish sentiment on the currency. The most notable losses for the CAD were against the GBP, EUR, and NZD, while the movements against USD and CHF were more subdued.
By the time the London session concluded, CAD regained some stability and edged higher, likely as market participants cashed in profits ahead of the Federal Open Market Committee (FOMC) decision.
