The Bank of
Canada (BoC) decreased its benchmark interest rate by 25 basis points to 3.00
per cent on Wednesday, as widely expected. This was the sixth consecutive reduction in the BoC’s policy interest rate. Also, the Bank announced
plans to complete the normalization of its balance sheet, ending quantitative
tightening.
In its policy
statement, the Canadian central bank noted:
- Updated 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 Trump administration;
-
Baseline forecast that does not suggest new tariffs suggest Canada's GDP growth
will strengthen in 2025, but will be more moderate than was expected in
October;
- Canada's GDP is predicted to grow by 1.8% in both 2025 and
2026, following growth of 1.3% in 2024;
-
CPI inflation remains close to 2%;
-
Shelter price inflation is still elevated but it is easing gradually;
- A
broad range of indicators suggests that underlying inflation is close to 2%;
- BoC forecasts CPI inflation to be around the 2% target
over the next two years;
-
Canada’s labour market remains soft, with the unemployment rate at 6.7% in
December;
-
Wage pressures, which have proven sticky, are showing some signs of easing;
- Setting aside threatened US tariffs, the upside and
downside risks around the outlook are reasonably balanced;
- A protracted trade conflict with U.S. would most likely
lead to weaker GDP and higher prices in Canada;
-
With inflation around 2% and the economy in excess supply, Governing Council
decided to reduce the policy rate a further 25 basis points;
-
Lower interest rates are boosting household spending, and economy is expected
to strengthen gradually and inflation to stay close to the BoC's target;
- If broad-based and significant tariffs were imposed, the
resilience of Canada’s economy would be tested;
-
BoC's policymakers will follow developments closely and assess the implications
for economic activity, inflation and monetary policy in Canada;
-
BoC is committed to maintaining price stability;
-
BoC will restart asset purchases in early March, beginning gradually so that
its balance sheet stabilizes and then grows modestly, in line with economic
growth;
- Purchases are intended to replace maturing assets, to offset the growth of currency notes in circulation and to stabilize settlement balances within a range over the course of the year