Bank of Canada Cuts Interest Rates and Updates GDP Projections for 2025

On Wednesday, the Bank of Canada announced that it has reduced its target for the overnight rate by 25 basis points to 3.0%, with the Bank Rate at 3.25% and the deposit rate at 2.95%.

The Bank also announced its plan to complete the normalization of its balance sheet, ending quantitative tightening. The Bank will restart asset purchases in early March, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy.

Projections in the January Monetary Policy Report (MPR) are subject to more-than-usual uncertainty because of the rapidly evolving policy landscape, particularly the threat of trade tariffs by the new administration in the US, the Bank said. Since the scope and duration of a possible trade conflict are impossible to predict, this MPR provides a baseline forecast in the absence of new tariffs.

The Bank is forecasting GDP growth will strengthen in 2025. However, with slower population growth because of reduced immigration targets, both GDP and potential growth will be more moderate than was expected in October. Following growth of 1.3% in 2024, the Bank now projects GDP will grow by 1.8% in both 2025 and 2026, somewhat higher than potential growth. As a result, excess supply in the economy is gradually absorbed over the projection horizon.