Bank of Canada Interest Rate Announcement (January 29, 2025)

Bank of Canada slows the pace of rate cuts, highlights downside risks from trade tariffs

• The Bank of Canada (BoC) slowed down the pace of rate cuts, with a 25 basis point move today, bringing the policy rate to 3.0%. It also stated that it will end Quantitative Tightening (QT) and restart asset purchases in March - This isn't a stimulative policy but rather helps match liquidity with the size of the economy. 
• The bank noted "more-than-usual uncertainty" surrounding its outlook due to the threat of trade tariffs. Although no specific tariff assumption was included within their forecast, it does recognize the threat has an impact on financial markets and business decisions. The bank is forecasting solid economic growth, averaging 1.8% in 2025 and 2026, while core inflation is forecasted to reach 2.1% by end-2025.
• In explaining why the BoC decided to slow the pace of cuts, it highlighted the cumulative reduction in the policy rate since June, which has boosted consumer spending and housing. This means the economy requires less monetary support from the central bank.

Key Implications

• The slowdown in the pace of rate cuts was widely expected. This more conservative approach makes sense for an economy that churned out 91k jobs last month and is likely to see solid GDP growth for the fourth quarter of 2024 of around 2%. At the same time, inflation remains under control, allowing the BoC to focus on the state of the economy. This approach also mitigates the risk that the policy rate diverges too much from the Fed (which is clearly on hold). The loonie remains under pressure, but seems to have stabilized at around 69 U.S. cents.
• The economic outlook has become highly uncertain with Donald Trump threatening to make an announcement on tariffs this Saturday. Canada exports $1.9 billion daily in goods and services south of the border. This sums to around 20% of Canada's economy, with nearly two million jobs dependent on U.S. trade. We are still hopeful that tariff threats are more of a negotiation tactic, meaning they would be temporary and carry less long term impacts. Yet, this is a tail risk that remains front and center in the mind of the BoC. Our baseline forecasts remains that the BoC will cut rates to 2.25% by year-end, but should 25% tariffs come into play for more than a few months, we'd expect the central bank to cut more aggressively in order to cushion the economy.

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