The Bank of Canada is gearing up for a series of interest rate cuts, marking a strategic move to bolster an economy grappling with sluggish growth and subdued inflation. In a bid to stimulate economic activity, the central bank is anticipated to reduce rates by 25 basis points each in January, March, April, and June 2025. This concerted effort will lower the policy rate to 2.25%, aligning it with the lower end of the perceived neutral policy rate range.
The decision comes against the backdrop of a noticeably slowing Canadian economy in late 2024, with mixed prospects as 2025 begins. The projected GDP growth for the coming year stands at 1.7%, a modest improvement over the estimated 1.3% growth in 2024. However, risks remain skewed toward an even slower recovery, prompting the Bank of Canada to adopt a cautious approach by easing monetary policy.
Subdued growth and contained inflation have set the stage for continued policy interest rate reductions in upcoming meetings. The Canadian dollar is likely to remain defensive over the medium term, weighed down by sluggish local growth, declining interest rates, and a cautious Federal Reserve stance on easing. The central bank's policy rate is expected to linger at the lower end of the neutral range, a strategic maneuver aimed at supporting economic momentum.
The household sector provides a sliver of resilience amid this economic landscape, bolstered by firming real income growth and the prospect of declining interest costs in the months ahead. Despite this, the outlook remains mixed, with potential risks emanating from U.S. tariff policies and domestic political developments.
In response to these challenges, the Bank of Canada is expected to maintain low-interest rates to support the economy. This strategy aligns with expectations of a modest uptick in growth in 2025, albeit with the policy rate anticipated to remain below the neutral threshold of around 2.25%. The Canadian dollar's defensive stance is likely to persist given the prevailing economic conditions and cautious monetary policy adjustments.