Bank of Canada cuts policy rate to 2.75% amidst economic uncertainty

Investing.com -- The Bank of Canada has announced a reduction in its target for the overnight rate to 2.75%, with the Bank Rate now at 3% and the deposit rate at 2.70%. This decision comes at a time when the Canadian economy is facing increased uncertainty due to trade tensions with the United States.

Entering 2025, the Canadian economy was in a solid position, with inflation near the 2% target and robust GDP growth. Despite this, the economic outlook remains uncertain due to rapidly evolving policies and the potential impact of tariffs imposed by the United States.

The US economy, after a period of solid growth, has shown signs of slowing down in recent months. Similarly, economic growth in the euro zone was modest at the end of 2024. China's economy, on the other hand, has seen strong gains, supported by government policies. Market expectations of weaker North American growth have resulted in falling equity prices and easing bond yields. Oil prices have been volatile, and the Canadian dollar remains broadly unchanged against the US dollar but weaker against other currencies.

Canada's economy grew by 2.6% in the fourth quarter of 2024, following a revised growth of 2.2% in the third quarter. This growth is stronger than expected at the time of the Bank's January Monetary Policy Report. Past cuts to interest rates have stimulated economic activity, particularly in the sectors of consumption and housing. However, the intensifying trade conflict is expected to slow economic growth in the first quarter of 2025.

Employment growth strengthened from November through January, and the unemployment rate declined to 6.6%. However, job growth stalled in February. There are concerns that the escalating trade tensions could disrupt the recovery in the job market. Wage growth has also shown signs of moderation.

Inflation remains near the 2% target. The temporary suspension of the GST/HST lowered some consumer prices, but January's CPI was slightly higher than expected at 1.9%. Inflation is anticipated to increase to about 2.5% in March with the end of the tax break. The Bank's preferred measures of core inflation remain above 2%, primarily due to the persistence of shelter price inflation.

Despite stronger than expected economic growth, the uncertainty created by US tariff threats is affecting consumers' spending intentions and businesses' plans to hire and invest. In response to this, and with inflation close to the 2% target, the Governing Council decided to reduce the policy rate by a further 25 basis points.

The Bank of Canada acknowledges that monetary policy cannot offset the impacts of a trade war. However, it can and must ensure that higher prices do not lead to ongoing inflation. The Governing Council will be closely monitoring inflation expectations and assessing the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs. The Bank remains committed to maintaining price stability for Canadians.

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