Bank of Canada cuts rate and ends quantitative tightening

The Bank of Canada cut its key interest rate by 25bps to 3% in its January 2025 decision, in line with market expectations, marking a total of 200bps in rate cuts since the start of the easing cycle in June 2024.

Bank of Canada cuts rate and ends quantitative tightening

This decision reflects the Bank's ongoing efforts to stimulate economic activity in the face of various challenges. Alongside the rate cut, the central bank also announced the end of its quantitative tightening (QT) policy, signaling a shift toward more accommodative monetary conditions. The BoC plans to restart asset purchases in early March to support liquidity and encourage the traction of economic activity, especially as the global economy faces continued uncertainty.

Inflation converged to the 2% target

In its statement, the Bank emphasized that the Consumer Price Index (CPI) has converged to the 2% target in recent months, a key milestone in its inflation control strategy, and is expected to remain close to the target over the next two years. While inflation pressures have moderated, the Bank noted that underlying inflation—measured by core inflation indicators—is also expected to approach the 2% mark, which justifies the continued policy normalization. This suggests that the BoC is focused on ensuring inflation expectations remain anchored even as it provides support for economic growth.

BoC outlook

Looking ahead, the Bank of Canada remains optimistic about the economy's trajectory. It forecasts a strengthening of GDP growth, projecting an expansion of 1.8% in both 2025 and 2026. This follows the expectation of a more modest 1.3% growth in 2024, reflecting the lingering effects of the earlier tightening cycle and global economic conditions. Overall, the Bank's latest decision highlights a balancing act between ensuring stable prices and supporting the recovery of economic activity in a challenging global environment.