On January 29th, Wednesday, the Bank of Canada cut interest rates by 25 basis points to 3%, in line with market expectations, marking the sixth consecutive meeting of rate cuts. The Bank of Canada also ended quantitative tightening (QT) and removed guidance on future adjustments to borrowing costs. U.S. President Trump's tariff threats have cast a shadow over Canada's economic outlook.
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In June last year, Canada began its easing cycle, cutting rates by 25 basis points; in the subsequent meetings in July and September, rates were again cut by 25 basis points each time; in the October and December meetings, the pace of rate cuts increased to 50 basis points; this time, the rate cut was reduced to 25 basis points.
Bank of Canada officials pointed out that the cumulative rate cut of 200 basis points since June last year is already a significant easing measure, and the latest guidance has removed any forward guidance for further rate cuts in the future.
The Bank of Canada also adjusted the deposit rate, setting it to 5 basis points lower than the overnight rate starting Thursday, a move that may aim to facilitate smoother settlement balances or reserve liquidity among financial market participants.
The Bank of Canada announced the completion of the normalization of its balance sheet and will end quantitative tightening (QT) on March 5. The bank plans to restart asset purchases at that time as part of normal asset-liability management, taking a gradual approach to stabilize the balance sheet and then allow for moderate growth in line with economic growth.
Canada is a pioneer in this round of monetary easing, being the first G7 country to cut rates. After the Bank of Canada cut rates in June last year, the European Central Bank and the Federal Reserve followed suit. The rate cuts in Canada have been larger than those by the Federal Reserve. The Bank of Canada estimates that since October last year, the divergence in interest rates between the Bank of Canada and the Federal Reserve has led to a depreciation of the Canadian dollar by about 1%.
The Bank of Canada stated in its announcement:
<blockquote>
The economy is expected to gradually strengthen, with inflation close to the target. However, if widespread and significant tariffs are implemented, the resilience of the Canadian economy will be tested.
</blockquote>
Bank of Canada Governor Macklem stated:
<blockquote>
Although monetary policy has helped restore price stability, widespread trade conflicts would severely harm economic activity, and rising commodity costs would directly push up inflation.
Relying solely on a single tool—our policy interest rate—cannot simultaneously address weak output and rising inflation. The Bank of Canada needs to carefully assess the downward pressure on inflation and weigh it against the upward pressure on inflation caused by higher input costs and supply chain disruptions.
</blockquote>
<h2>Economy, Inflation, Tariffs</h2>
The Bank of Canada has lowered its economic growth forecast for 2025 due to the federal government's reduction of immigration targets, now expecting economic growth of 1.8% in 2025 and 2026, down from previous forecasts of 2.1% and 2.3%. The Bank of Canada also lowered its expectations for business investment and exports but raised its forecast for consumer spending.
The Bank of Canada expects inflation in the country to remain near the 2% target until 2026 and stated that the risks of upward and downward inflation pressures are &#34;relatively balanced.&#34; Policymakers noted that they found rate cuts are boosting the economy through consumption and housing activity, and the existing excess supply will be &#34;gradually absorbed&#34; in the coming years
The Canadian job market remains weak, with an unemployment rate of 6.7% in December. Employment growth has recently strengthened, reversing the sluggish trend in the labor market that has persisted for over a year.
The Bank of Canada believes that the threat of potential tariffs is significant, making the country's economic outlook uncertain. Trump has threatened to impose a 25% tariff on Canada as early as this Saturday, while the Canadian government vows to retaliate.
The Bank of Canada has presented an economic forecast that does not consider tariffs, but has also developed a scenario analysis to assess how a long-term trade dispute between the U.S. and Canada (with both sides imposing a 25% tariff) could disrupt the economy:
<blockquote>
Overall, the main impact of the trade conflict will be to push up prices in Canada, even as economic activity slows significantly. In this scenario, the price increases due to rising import costs and the depreciation of the Canadian dollar will outweigh the effects of declining exports, reduced business investment, and weak demand.
</blockquote>
<h2>Analysis and Market Reaction</h2>
Media analysis suggests that overall, the Bank of Canada is unlikely to make further adjustments to monetary policy until the specific details of Trump's trade policy become clearer. Without the threat of tariffs, the Canadian economy appears to be getting closer to a soft landing.
Investors are awaiting President Trump's threat of tariffs on Mexico and Canada on February 1. After the Bank of Canada cut interest rates on Wednesday:
<ul>
<li>The Canadian stock index rose 0.3%, with nine out of eleven sectors gaining, and the materials sector performing particularly well.</li>
<li>The yield on Canadian two-year government bonds fell by about 4 basis points to 2.79%, the lowest level since 2022.</li>
<li>The Canadian dollar continued to decline against the U.S. dollar, hovering around 1.4448</li>
</ul>

The Bank of Canada has cut interest rates for the sixth consecutive meeting. Officials pointed out that the reduction of 200 basis points since June of last year has been a significant easing measure, and the latest decision has removed any forward guidance for further rate cuts in the future. President Trump's tariff threats have cast a shadow over Canada's economic outlook

- On January 29, the Bank of Canada cut interest rates by 25 basis points to 3%, marking the sixth consecutive meeting of rate reductions.  
- The central bank ended quantitative tightening and adjusted deposit rates to encourage smoother financial market operations, while also revising economic growth forecasts downwards due to potential tariffs from the U.S.  
- The Bank of Canada anticipates inflation will remain near the 2% target until 2026, but warns that widespread tariffs could significantly impact economic resilience and inflation dynamics.

Wallstreetcn

The G7 pioneer, the Bank of Canada, lowered interest rates by 25 basis points, ending quantitative tightening and canceling future rate cut guidance