Key Takeaways:
- The Bank of Canada (BoC) is set to make its first lending rate announcement of the year on January 29
- Canadians are eager to see if the central bank will continue its 2024 rate cutting spree, or decide to hold its lending rate
- TD Economist James Orlando said TD Economics is predicting the BoC will cut its lending rate by 25 basis points, a smaller cut than the 50 basis points in December
- Whenever the BoC cuts its lending rate, it can become cheaper for Canadians to borrow money
As Canadians settle into 2025, the Bank of Canada (BoC) is getting ready for its first lending rate announcement of the year.
On January 29, the central bank will reveal whether it is cutting its lending rate — which currently sits at 3.25% — or holding it.
According to TD Economist James Orlando, current data point towards a cut of 25 basis points, or 0.25%, which is less than the December 2024 rate cut of 50 basis points.
If the central bank slices its lending rate by 0.25% in January, that will bring the overnight lending rate down to 3.00%.
“Given where interest rates are in Canada right now, we think the BoC can go a little bit slower with its cuts,” Orlando said, pointing out that the central bank also cut by 50 basis points in October. “We are in this sort of ‘neutral’ range that does not choke nor stoke economic growth.”
Orlando said that factors such as increased consumer spending and the latest Statistics Canada job report, which showed that employers added 91,000 jobs in December 2024, indicate that the economy is showing signs of resilience.
“Consumers were hampered by high interest rates over the past couple of years, and as those rates came down, we’ve started to see a greater willingness to spend, whether it be going out to restaurants, paying for services, or buying physical goods,” Orlando said.
What a rate cut could mean for Canadians
The central bank’s lending rate influences the interest rate financial institutions charge on products such as mortgages and loans. So, when the BoC’s lending rate goes up, it can become more expensive for Canadians to borrow money. Whenever the BoC cuts its lending rate, it can become cheaper.
For Canadians with variable rate mortgages, rate cuts can mean more of their mortgage payment goes towards the principal of the mortgage, and less towards interest.
For Canadians with fixed rate mortgages, a BoC rate cut does not immediately make an impact. Fixed rate mortgages are commonly based on five-year bond yields, Orlando said.
What a rate hold could mean for Canadians
While Orlando said that TD Economics predicts the BoC will announce a rate cut in January, there is still a chance that the central bank will decide to hold its rate. The current resilience of Canada’s economy supports the justification for a rate hold, he said.
If the BoC does hold its lending rate at 3.25%, not much will change for the average Canadian.
“TD Economics believes that in the near future, the Bank of Canada is going to have to start announcing rate holds at meetings,” Orlando said. “So, the question is: does the central bank do that in January, or in March at the next rate announcement?”
Upcoming factors to watch for
The upcoming BoC announcement is coming at a “very precarious time” Orlando said, nine days after the U.S. presidential inauguration. President-elect Donald Trump is threatening to impose a 25% tariff on Canadian exports, which could have a significant impact on Canada’s economy.
“There’s fear that Trump's going to implement a slew of tariffs or measures that will negatively affect the growth of the Canadian economy,” Orlando said. “And if that happens, then the prospect for growth in 2025 takes a hit, and the Bank of Canada might want to take out a little bit more insurance and follow through with a rate cut.”
The December 2024 inflation report from Statistics Canada is also set to be released on January 21, about a week before the BoC rate announcement. In the past few years, inflation was higher than the 2% target the BoC aims for, which is why the BoC began raising rates in March 2022.
The good news, Orlando said, is that inflation has stabilized around 2%, which is exactly what the central bank wants. Therefore, there is a good chance the upcoming report will show inflation is not an issue, he said, and shouldn't be a huge factor in the rate decision.
Orlando said that for 2025, TD Economics predicts the BoC will cut the lending rate in total by another 100 basis points by the end of the year. That means by the end of 2025, the BoC’s lending rate could sit around 2%.
“When rates were at 5%, they were exuding a lot of pressure on the country. Now that rates are around 3%, they're not putting as much pressure on the economy,” Orlando said. “We think that something around 2% is probably where the central bank is going to settle.”