Prime Highlights
- The Bank of Canada policy rate will dip to 2.25% by 2025’s end.
- The rates will remain unchanged in 2026, and it shall be a dovish monetary policy.
Key Fact
- Markets anticipate at least two interest rate cuts in 2025.
- A hold steady in 2026 will likely inject stability into the economy and temper inflation.
Key Background
Markets expect the Bank of Canada to lower its overnight policy rate to 2.25% from 2.75% by year-end 2025. This follows a growth slowdown prediction and ease of inflation pressures, and is sparking expectations of numerous rate cuts in the next one-year horizon. The central bank would also be required to hold the rate at this lower level until 2026, focusing on stable and dovish monetary policy.
This fits with the sentiments of recent investment houses’ and economists’ expectations. A majority have predicted that the Bank will leave policy rates steady in the near term but shift towards gradual monetary loosening as economic indicators reflect softer business spending, falling consumer consumption, and softer labor market conditions. Two cuts in 2025 are seen most likely, the first in the second half of the year.
The prime driver of such expectations is the evolving inflation landscape. Although headline inflation has been moving closer to the Bank 2% target, core inflation has been obstinate and requires accurate monetary policy calibration. Second, uncertainty surrounding global trade, particularly on U.S. tariffs and supply chain restructurings, is also likely to continue as a dampener to Canadian economic performance.
Maintaining the policy rate at a moderate pace after projected reductions is a sign of a preemptive strategy of restraint from tightening in an attempt to keep inflation at bay. Holding rates at 2.25% through 2026, the Bank of Canada would aim to provide businesses and households with a stable economic environment, supporting moderate economic growth without unleashing inflationary pressures.
