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Bank of Canada cuts interest rate by 25 basis points to 3%
January 29, 2025 | Posted by: Dominion Lending Centres National Advantage Mortgages
On January 29, 2025, the Bank of Canada announced a 25 basis point reduction in its key policy rate, bringing it down to 3%. This marks the sixth consecutive rate cut, reflecting the central bank's ongoing efforts to bolster the Canadian economy amid various challenges.
Economic Context and Rationale
The decision to lower the interest rate is primarily driven by a sluggish economy and persistently low inflation. The Bank has revised its growth forecasts, now projecting the economy to expand by 1.8% in 2025, down from an earlier estimate of 2.1%, and by 1.8% in 2026, reduced from 2.3%. Concurrently, the inflation forecast has been adjusted upward to 2.3% for 2025 and 2.1% for 2026.
Impact of Potential U.S. Tariffs
A significant concern influencing this monetary policy decision is the looming threat of a 25% tariff on Canadian imports, announced by U.S. President Donald Trump. The Bank of Canada warns that such tariffs could have severe economic repercussions. If Canada responds with retaliatory measures, it's estimated that the nation's economic growth could be reduced by 4 percentage points over the next two years.
Market Reactions and Future Outlook
Following the rate cut announcement, the Canadian dollar experienced a decline of 0.24%. The Bank also indicated plans to conclude its quantitative tightening program by March and signaled the possibility of further rate cuts, especially if the U.S. proceeds with the proposed tariffs.
Analysts have weighed in on the Bank's decision. Andrew Kelvin from TD Securities noted that the rate cuts have effectively improved the Canadian economy, with the Bank of Canada ready to respond further if U.S. tariffs are implemented. Doug Porter of BMO Capital Markets indicated that the rate cut was anticipated, and the Bank's response to tariffs aligned with expectations, although he acknowledged the serious risk if 25% tariffs are imposed. Nick Rees of Monex Europe Ltd. criticized the Bank's caution regarding further rate cuts, arguing that tariffs would harm Canadian growth and that maintaining tight policy could result in undue economic damage.
Conclusion
The Bank of Canada's latest rate cut underscores its proactive stance in navigating economic uncertainties. As global trade dynamics evolve and domestic challenges persist, the central bank remains vigilant, ready to adjust its policies to support sustained economic growth and stability.
reuters.com