Bank of Canada weighs first move of 2025

The Bank of Canada (BoC) is preparing to make its first key policy decision of the year on January 29, with Canadians eager to see whether the central bank will cut its overnight lending rate further or hold steady.

Currently sitting at 3.25%, the overnight rate influences borrowing costs for mortgages, loans, and other financial products. Economists at TD Bank, led by James Orlando, predict a 25-basis-point reduction, a smaller cut than the 50-basis-point decrease announced in December 2024. If realized, the new rate would drop to 3.00%.

“Given where interest rates are in Canada right now, we think the BoC can go a little bit slower with its cuts,” Orlando stated, noting that the economy appears resilient. “We are in this sort of ‘neutral’ range that does not choke nor stoke economic growth.”

Economic resilience driving predictions

Orlando pointed to encouraging economic data, including a December 2024 jobs report showing 91,000 new positions created and increased consumer spending. He observed that lower interest rates throughout 2024 have relieved financial pressure on households, enabling greater spending on goods and services.

“Consumers were hampered by high interest rates over the past couple of years, and as those rates came down, we’ve started to see a greater willingness to spend,” Orlando said.

Implications for borrowers

A potential rate cut would have different effects depending on the type of loan, experts noted. Canadians with variable-rate mortgages could benefit immediately, as more of their payments would shift toward reducing the principal rather than covering interest costs. However, those with fixed-rate mortgages would not see an immediate impact, as their rates are tied to bond yields rather than the BoC’s lending rate.

If the BoC opts to hold its rate at 3.25%, financial conditions for most Canadians would remain unchanged. Orlando suggested that a rate hold could soon become the central bank’s likely course of action. “The question is: does the central bank do that in January, or in March at the next rate announcement?” Orlando said.

External and domestic factors at play

The timing of the rate decision is critical, as it coincides with potential economic challenges. Nine days prior to the BoC announcement, the US presidential inauguration will take place. President-elect Donald Trump has proposed a 25% tariff on Canadian exports, which could significantly impact Canada’s economy.

“There’s fear that Trump’s going to implement a slew of tariffs or measures that will negatively affect the growth of the Canadian economy,” Orlando said. “The Bank of Canada might want to take out a little bit more insurance and follow through with a rate cut.”

Additionally, Statistics Canada is set to release the December 2024 inflation report on January 21, just days before the BoC’s decision. Inflation has stabilized at the central bank’s 2% target, which could reduce its influence on the upcoming decision.

Looking ahead

TD Economics forecasts further rate reductions throughout 2025, with the overnight rate potentially falling to 2% by year’s end. According to Orlando, this level would strike a balance between supporting economic growth and avoiding excessive borrowing.

“When rates were at 5%, they were exuding a lot of pressure on the country. Now that rates are around 3%, they’re not putting as much pressure on the economy,” he said. “We think that something around 2% is probably where the central bank is going to settle.”

Source CMP
By Jonalyn Cueto