Bank of Canada reduces the policy rate by 25 base points to 3%, announces the end of quantitative tightening

On January 31, 2025By Littum

Today, the Bank of Canada reduced its target for night to 3%with the bank rate of 3.25%and the deposit of 2.95%. The bank also announces its plan to complete the normalization of its balance and end quantitative tightening. The bank restarts asset purchases in early March, which gradually begins so that its balance is stabilized and then growing modestly in line with growth in the economy.

Projections in January Monetary Political Report (MPR), published today, is subject to more than normal uncertainty due to the rapidly developing political landscape, especially the threat of trading tariffs from the new administration in the United States. Since the scope and duration of a possible trade conflict is impossible to predict, this MPR gives a baseline forecast in the absence of new tariffs.

In the MPR projection, the global economy is expected to continue to grow by approx. 3% over the next two years. Growth in the United States has been revised, mainly due to stronger consumption. Growth in the euro area is likely to be muted when the region handles competitiveness. In China, recent political actions increase demand and support growth in the short term, although there are still structural challenges. Since October, economic conditions have been diverged across countries. US bond yields have risen, supported by strong growth and more persistent inflation. In contrast, the yield in Canada is slightly down. The Canadian dollar has been essentially depreciated against the US dollar, which largely reflects trade uncertainty and wider strength in the US currency. Oil prices have been unstable and in recent weeks have been about $ 5 higher than assumed in MPR in October.

In Canada, previous cuts to interest rates have begun to increase the economy. The recent strengthening in both consumption and housing activity is expected to continue. However, business investments remain weak. The outlook for export is supported by new export capacity for oil and gas.

Canada’s labor market remains soft with unemployment to 6.7% in December. Job growth has been strengthened in recent months after hanging growth in the workforce for more than a year. Salary pressure that has been found sticky shows some signs of ease.

However, the bank predicts GDP growth will strengthen itself in 2025. With slower population growth due to reduced immigration targets, both GDP and potential growth will be more moderate than expected in October. After growth of 1.3% in 2024, the bank is now projecting GDP to grow by 1.8% in both 2025 and 2026, somewhat higher than potential growth. As a result, excess supply in the economy is gradually absorbed over the projection horizon.

CPI inflation remains close to 2%with some volatility due to the temporary suspension of GST/HST on some consumer products. Light price inflation is still elevated, but it gradually facilitates as expected. A wide range of indicators, including studies of inflation expectations and distribution of price changes among CPI components, suggests that underlying inflation is close to 2%. The bank predicts the CPI inflation will be around the 2% target over the next two years.

Designing us with American tariffs, upside and downward risks around the prospects is reasonably balanced. However, as mentioned in MPR, a long -term trade conflict would probably lead to weaker GDP and higher prices in Canada.

With inflation around 2% and the economy of excess supply, the regulated advice decided to reduce the policy rate another 25 basic points to 3%. The cumulative reduction in the policy rate since last June is significant. Lower interest rates increase household costs, and in the prospects published today, the economy is expected to strengthen gradually and inflation to remain close to the target. But if widely based and significant tariffs were imposed, the resilience of Canada’s economy would be tested. We will follow the development closely and assess the consequences for economic activity, inflation and monetary policy in Canada. The bank is required to maintain price stability for Canadians.

Information note

The next scheduled date for announcing the target at night is March 12, 2025.

29 January 2025

The bank announced that it will make an adjustment to the deposit. From January 30, the deposit rate will be set to a spread of 5bps under the bank’s political interest rate. This change in the monetary policy implementation framework is made to improve its effectiveness. The purpose of this change is to improve circulation of settlement balances as they fall towards stable levels in the coming months and support the function of short -term financing markets. Adjustment of the deposit rate must also help mitigate some of the upward pressure seen at the overnight stay at the bank’s target rate in recent months and help strengthen the effect of the bank’s overnight repos (OR) operations.

Occasional adjustments to the disposal of the deposit rate may be required during normal operations. These spread adjustments will, among other things, be considered after a period of persistent and sustained upward or downward pressure on Corra and would be communicated via a market announcement. We will assess the effect of this change as the balance continues to develop and evaluate the need for further adjustments to our implementation framework.

In addition, the bank adjusts its framework for reverse reverse repo (ORR) operations with it or operations. From January 30, when required, ORR operations are carried out through a uniform price auction with a total cash value amount offered in each operation of at least $ 8 billion and individual dealer limits for each $ 3 billion. The conditions and conditions of ORR operations have been updated to reflect this change and provide additional operational details.

Director
Department of Financial Markets

29 January 2025

Today, the Bank of Canada announces its plan to complete its normalization of the balance and end quantitative tightening. From the beginning of March, the bank will start buying assets as part of normal balance management. Purchases are intended to replace mature assets, to offset the growth of currency announcements in circulation and stabilize settlement balances within an interval throughout the year.

Activation purchases begin with the reboot of the regular repo program, followed by the Government of Canada (GOC) Treasury Bill to restore a more balanced mix of assets on the bank’s balance.

As such, the bank will restart its semester -Repo program with effect 5 March 2025, and the operations are carried out every two weeks. Conditions change between 1 month operations and 1- and 3-month operations depending on the week. Originally, the termrepo operations varies between $ 2BLN and $ 5BLN. The sizes will increase over time as the bank’s need for additional assets grows. Final operational details, including the size and the specific maturity date of the term repos, will be published a week before the operating date. See the updated terms and conditions for further information.

Treasury Bill purchases will be resumed later in the year and will be implemented via GOC auctions. Purchase amounts are advertised via the general invitation to tender process. The time of resumption of purchase of the Treasury ultimately depends on the development of the bank’s balance, including the recording of the term repo program.

Purchase of GOC bonds is likely to not need to start until the end of 2026 earlier based on current projections for the bank’s future asset needs. When they begin, they will be implemented in the secondary market. A subsequent market announcement containing operational details will be published well in advance.

Director
Department of Financial Markets