The Bank of Canada has announced a 25-basis point reduction in its overnight rate target, bringing it to 3%. The Bank Rate is now set at 3.25%, while the deposit rate stands at 2.95%. Additionally, the Bank has confirmed the completion of its balance sheet normalization, marking the end of its quantitative tightening policy. Asset purchases are set to resume in early March, gradually increasing to ensure the balance sheet stabilizes and expands in alignment with economic growth.
Economic Projections and Market Conditions
The latest Monetary Policy Report (MPR) highlights heightened uncertainty in economic forecasts due to evolving global trade policies. Notably, potential tariffs imposed by the new U.S. administration introduce risks that are difficult to quantify. However, the MPR’s baseline projection excludes any new tariffs in its economic outlook.
Over the next two years, global economic growth is expected to maintain a steady pace of approximately 3%. The U.S. economy has demonstrated resilience, particularly in consumer spending, while Europe faces economic challenges due to competitiveness concerns. China’s policy measures are driving short-term demand, though long-term structural hurdles persist. Since October, financial conditions have varied significantly across different markets. U.S. bond yields have increased due to robust growth and persistent inflation, whereas Canadian yields have declined slightly. The Canadian dollar has depreciated against the U.S. dollar, reflecting trade uncertainty and broader U.S. currency strength. Meanwhile, oil prices have remained volatile, currently averaging about $5 higher than previous projections.
Domestic Economic Outlook
Canada’s past interest rate reductions have started to stimulate economic activity, with consumption and housing sectors experiencing continued growth. However, business investment remains subdued. The export sector is benefiting from enhanced capacity in the oil and gas industry.
Labour market conditions remain soft, with the unemployment rate recorded at 6.7% in December. Recent months have seen an improvement in job creation, although it continues to lag behind labour force expansion. Wage pressures, which have been persistent, are beginning to ease slightly.
The Bank projects GDP growth to strengthen in 2025. However, due to a slowdown in population growth following adjustments to immigration targets, GDP expansion will be more moderate than previously anticipated. After a 1.3% growth rate in 2024, GDP is expected to increase by 1.8% in both 2025 and 2026—somewhat higher than potential growth—gradually absorbing excess supply in the economy.
Inflation Trends and Monetary Policy Stance
The Consumer Price Index (CPI) inflation rate remains near 2%, albeit with some fluctuations due to the temporary suspension of GST/HST on select consumer goods. While shelter price inflation remains elevated, it is gradually declining as projected. Multiple economic indicators, including inflation expectation surveys and CPI component analysis, indicate that underlying inflation is stabilizing near the 2% target. The Bank forecasts CPI inflation to remain around this level for the next two years.
While the outlook remains balanced, the risk of a prolonged trade dispute with the U.S. could negatively impact GDP growth and push prices higher. Considering current inflation levels and economic conditions, the Governing Council opted to lowers policy rate by an additional 25 basis points. This reduction contributes to the cumulative rate cuts since June, aimed at supporting household spending and economic recovery. Moving forward, the Bank will closely monitor economic developments and assess potential risks related to inflation, economic activity, and trade policies.
Adjustments to Deposit Rate and Overnight Reverse Repo Operations
Effective January 30, the Bank is adjusting its deposit rate to 5 basis points below its policy interest rate to enhance the effectiveness of monetary policy implementation. This adjustment is intended to facilitate settlement balance circulation and support short-term funding market operations. Additionally, this change is expected to mitigate upward pressure on the overnight rate relative to the Bank’s target.
Future adjustments to the deposit rate spread may be necessary in response to sustained market trends. The Bank will evaluate these factors and communicate any changes through official market notices.
Moreover, the Bank is modifying the operational framework for its Overnight Reverse Repo (ORR) operations. Starting January 30, ORR operations will be conducted via a uniform price auction with a minimum cash value of $8 billion per operation and an individual dealer cap of $3 billion. The updated ORR terms aim to enhance the effectiveness of monetary policy and provide greater transparency.
Resumption of Asset Purchases to End Quantitative Tightening
With quantitative tightening concluding, the Bank of Canada will resume asset purchases in early March to maintain balance sheet stability. Initial purchases will focus on replacing maturing assets, offsetting the growth in currency circulation, and ensuring stable settlement balances.
The asset purchase program will commence with the reinstatement of the term repo program on March 5, 2025. Term repo operations will occur biweekly, alternating between 1-month operations and a mix of 1- and 3-month operations. Initial operation sizes will range from $2 billion to $5 billion, with gradual increases as required.
Later in the year, the Bank will reintroduce Government of Canada (GoC) treasury bill purchases via standard GoC auctions. The exact timing will depend on the evolution of the Bank’s balance sheet, particularly the uptake of the term repo program. Based on current projections, purchases of GoC bonds will not be necessary until late 2026 at the earliest. These purchases, when initiated, will be conducted in the secondary market, with further details to be provided in a subsequent market notice.
Future Policy Announcements
The next scheduled interest rate announcement is set for March 12, 2025. Additionally, the Bank will release its next full economic and inflation outlook, including a risk assessment, in the Monetary Policy Report on April 16, 2025.
By continuing to monitor economic conditions and adjusting its monetary policy accordingly, the Bank of Canada remains committed to maintaining financial stability and supporting sustainable economic growth.