Key Takeaways:
- The Bank of Canada (BoC) just cut its lending rate by 25 basis points, bringing it down to 3%
- This first rate announcement of 2025 signals that the central bank is still in its cutting phase, continuing its series of cuts that began in June 2024
- Whenever the BoC cuts its lending rate, it can become cheaper for Canadians to borrow money
The Bank of Canada (BoC) kicked off 2025 with another rate cut.
On January 29, the central bank announced it is lowering its lending rate by 25 basis points, bringing it down to 3%. In December, the BoC cut its lending rate by 50 basis points.
TD Economist James Orlando said this move is in line with what TD Economics predicted as the economy is showing signs of resilience, justifying a smaller rate cut than the one we saw late last year. Still, the BoC wants to keep supporting economic growth via lower rates, Orlando said.
"While the Bank has moved from a cut of 50 basis points to 25 basis points, today's decision shows the central bank is willing to increase the interest rate gap with the U.S., despite the pressure this will put on the Loonie," Orlando said.
In its announcement, the BoC said:
"With inflation around 2% and the economy in excess supply, Governing Council decided to reduce the policy rate a further 25 basis points to 3%. The cumulative reduction in the policy rate since last June is substantial."
"Lower interest rates are boosting household spending and, in the outlook published today, the economy is expected to strengthen gradually and inflation to stay close to target. However, if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested. We will be following developments closely and assessing the implications for economic activity, inflation and monetary policy in Canada. The Bank is committed to maintaining price stability for Canadians."
What the January rate cut could mean for Canadians
A BoC lending rate cut, in general, can mean interest rate relief for many 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, and are therefore reflected in current fixed mortgage rates.
Will the BoC continue to cut rates in 2025?
The looming threat of a 25% tariff on Canadian exports under U.S. President Donald Trump may impact the Canadian economy. If Trump enacts blanket tariffs, it could negatively affect the growth of the Canadian economy, Orlando said. That means the BoC might create a cushion for the economy by accelerating rate cuts.
That said, TD Economics predicts the BoC will cut its 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%, Orlando said.
“The Bank of Canada will continue monitoring the uncertain economic conditions,” Orlando said. “Recent data showed that core inflation may be trending upwards, giving the central bank a reason to adopt a more gradual pace of rate cuts this year.”