The Bank of Canada has lowered its target for the overnight rate to 2.75%, alongside adjustments to the Bank Rate at 3% and the deposit rate at 2.70%. This decision comes amid a solid start to 2025 for the Canadian economy, with inflation nearing the 2% target and GDP growth remaining robust.

However, trade tensions and tariffs imposed by the United States are expected to slow economic activity in Canada and exert inflationary pressures. The economic outlook is fraught with uncertainty due to rapidly changing policies.

In recent months, US economic growth has slowed, while inflation remains slightly above target. The euro zone saw modest growth late last year, whereas China's economy continues to grow strongly due to government policies. Market expectations of weaker North American growth have led to falling equity prices and easing bond yields. Oil prices remain volatile and below previous assumptions.

Canada's economy grew by 2.6% in Q4 of 2024 after an upward revision of Q3 growth figures to 2.2%. This was stronger than anticipated in January's Monetary Policy Report (MPR). Past interest rate cuts have spurred consumption and housing activities, but a slowdown is expected in early 2025 due to trade conflicts affecting sentiment and activity levels.

Employment saw gains from November through January with unemployment dropping to 6.6%, but job growth stalled in February. Although past rate cuts increased labour demand recently, trade tensions threaten job market recovery. Wage growth shows signs of moderation.

Inflation hovers near the target; temporary tax suspensions reduced some consumer prices temporarily, but January’s CPI was firmer than anticipated at 1.9%. Inflation could rise to around 2½% in March as tax breaks end. Core inflation measures exceed 2%, largely due to persistent shelter price increases.

Despite stronger-than-expected economic performance, ongoing US tariff threats create pervasive uncertainty affecting consumer spending intentions and business investments plans. Consequently, Governing Council opted for a further policy rate reduction by 25 basis points.

"Monetary policy cannot offset the impacts of a trade war," emphasized the Council, noting their focus on preventing higher prices from leading into sustained inflation while monitoring both downward pressures from a weaker economy and upward pressures from rising costs.

The next announcement regarding the overnight rate target is scheduled for April 16, when a comprehensive outlook on economy and inflation will be published in conjunction with potential risks outlined in MPR.