With five rate cuts bringing the overnight rate down from five per cent to 3.25 per cent, 2024 was a monumental year for the Bank of Canada (BoC). The BoC’s announcement of its final cut of the year, 50 basis points on December 12, was accompanied by language forecasting a slowdown in the pace of cuts.
Since then, new data on Canada’s GDP has given economists additional information to refine their forecasts and consider how BoC governor Tiff Macklem’s expectation of “a more gradual approach to monetary policy” might play out.
The most recent data showed Canada’s real GDP increased 0.3 per cent in October, driven by growth in oil and gas extraction, following a 0.2 per cent rise in September. While the October growth was slightly more than analysts had expected, Statistics Canada said advance estimates showed real GDP fell 0.1 per cent in November. CIBC economist Andrew Grantham noted that even with the stronger-than-expected October data, fourth-quarter GDP is on track to fall slightly below the BoC’s projected growth of two per cent.
The banks’ economists generally expect the BoC to make a 25 basis point cut at its January 29 policy meeting, though National Bank of Canada economist Daren King noted “important” consumer price index data and employment data coming out in January ahead of that announcement.
National Bank, TD and BMO economists did not offer specific forecasts for the remainder of 2025 in their notes on the October GDP data. BMO economist Benjamin Reitzes wrote that the figures show nothing to indicate a change to the BoC’s narrative of gradual rate cuts.
CIBC and Desjardins Group both expect the overnight rate to drop to 2.25 per cent by the end of 2025, given the economic conditions described by the GDP data.
Desjardins’ LJ Valencia also noted three major factors that could “weigh down” the economy. These factors are the “mortgage renewal wall,” in which a significant proportion of mortgage holders renew at higher rates, lower population growth brought on by recent immigration policies and the tariffs threatened by U.S. president-elect Donald Trump. In his prepared statement during the December rate announcement, Macklem called the possibility of new tariffs “a major new uncertainty.”
CIBC’s Grantham noted that Canada’s Q4 GDP is still not growing as much as it could and needs to improve to reduce unemployment. According to the National Bank’s Darren King, marginal rate relief is also required.
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