In a widely anticipated move, the Bank of Canada reduced its benchmark overnight interest rate by 25 basis points to 2.75 percent on March 12, 2025. As part of this monetary policy adjustment, the Bank Rate now stands at 3.0 percent, while the deposit rate has been revised to 2.70 percent. The decision comes at a time when the Canadian economy, although entering the year on solid footing, faces emerging headwinds largely driven by international trade disputes and heightened economic uncertainty.
Canada began 2025 with encouraging economic indicators. Inflation hovered near the central bank’s 2 percent target, and gross domestic product (GDP) growth remained strong. The economy grew by 2.6 percent in the fourth quarter of 2024, following an upward revision of 2.2 percent growth in the previous quarter. The positive momentum was partly driven by previous interest rate cuts, which spurred increases in household consumption and housing activity. However, the outlook for the months ahead appears increasingly uncertain.
The primary concern influencing the rate cut is the growing impact of trade tensions, particularly escalating tariffs introduced by the United States. These developments are expected to slow economic activity and contribute to inflationary pressures in Canada, complicating the monetary policy landscape. The Bank of Canada acknowledged that uncertainty surrounding global trade policy remains elevated, restraining business investment and dampening consumer sentiment.
Market data shows a shift in expectations, with equity prices falling and bond yields easing due to forecasts of weaker economic performance across North America. Oil prices have been volatile and are now trading below the Bank’s January 2025 Monetary Policy Report (MPR) assumptions. The Canadian dollar has remained steady against the US dollar but weakened against other major currencies, reflecting the broader market sentiment.
While employment trends had shown strength between November and January, with the unemployment rate falling to 6.6 percent, job creation stalled in February. Consumer and business confidence surveys suggest a declining appetite for spending and investment, a reflection of the broader economic concerns. Additionally, while wage growth had been strong, recent signs point toward moderation.
Inflation, though currently close to the target, remains under close watch. January’s consumer price index (CPI) rose slightly to 1.9 percent, and with the expiration of temporary tax relief measures like the GST/HST suspension, inflation is expected to rise further to around 2.5 percent in March. Core inflation metrics remain elevated due to persistent shelter cost increases, and short-term inflation expectations have edged higher amid tariff concerns.
Despite the relatively strong GDP numbers, the Bank emphasized that it cannot insulate the economy from the adverse effects of a trade war. The Governing Council clarified that the latest rate cut is aimed at maintaining price stability and preventing short-term cost shocks from morphing into sustained inflationary trends. Moving forward, the central bank will closely monitor inflation expectations and assess both upward pressures from tariffs and downward pressures from slowing domestic and global demand.
The Bank of Canada reaffirmed its commitment to its inflation-targeting framework and expressed readiness to adjust its policy stance further as required. In this context of global volatility and domestic caution, the latest rate cut is a signal that Canada’s central bank remains vigilant and responsive to an increasingly complex economic environment.