What to expect from the Bank of Canada during the January 29 rate announcement: Experts weigh in with “optimistic” 0.25% rate cut

The Economic context: Canada’s current landscape

After battling inflationary pressures in recent years, Canada’s inflation rate has steadily eased. In December 2024, inflation dropped to 1.8%, within the BoC’s target range.

This decline marks a significant improvement, as Chief Economist at BMO, Douglas Porter, noted: “Given that we've seen a substantial decline in inflation in the past year and interest rates are coming down, the broad economic picture suggests a rebound for the Canadian economy after two years of sluggish performance.”

The labour market has also shown remarkable resilience, with strong employment growth and rising consumer spending. However, there’s an intricate interplay between falling inflation and economic activity.

Head of Canadian Fixed-Income Strategy at BlackRock, Rachel Siu, emphasized the BoC’s “data-dependent framework,” suggesting that future rate decisions will hinge on continued economic indicators.

The housing market remains a central concern, particularly as mortgage renewals approach under relatively high borrowing costs. Yet, signs of relief are emerging.

Tiago Figueiredo, macro strategist at Desjardins, said, “That amount of easing should be enough to weather the storm from upcoming mortgage renewals and should see economic activity increase.”

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Bank of Canada’s policy stance

Throughout 2024, the BoC implemented a series of rate cuts to support economic recovery. While these measures have begun to stimulate activity, the question remains whether the central bank will opt for additional cuts in 2025.

James Orlando, an economist at TD, highlighted the cautious approach: “Given where interest rates are in Canada right now, we think the BoC can go a little bit slower with its cuts.” This perspective suggests that past easing efforts may have already laid the groundwork for recovery, providing the BoC with an opportunity to pause and assess their impact.

Internationally, central banks are adopting varied strategies, with some accelerating rate hikes while others hold steady or cut rates. The BoC’s decision will underscore its unique approach to balancing domestic needs and global trends. Jennifer Lee, senior economist at BMO, pointed out, “That alone could be an occasion for more policy caution, particularly when past easing efforts are already showing some signs of gaining traction (evidenced by home and vehicle sales).”

External risks: The tariff factor

Global trade remains a critical external risk for Canada’s economy. Recently imposed US tariffs have strained trade relations and could have ripple effects on Canadian industries.

Global Chief Economist at Manulife Investment Management, Frances Donald, remarked: “The two economic stories are becoming very different in a way that we haven't seen for literally many decades. And in 2025, I think we'll spend a lot of time talking about how Canada's economy has fundamentally and maybe permanently shifted away from the US model.”

The BoC must weigh these external challenges to assess whether further rate cuts could help insulate Canada’s economy or exacerbate trade imbalances. Potential retaliatory measures against US tariffs add another layer of complexity to the economic outlook.

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Market expectations and analyst predictions

Economist forecasts from a recent Reuters poll indicate that 80% of respondents expect the BoC to implement a 25-basis-point (0.25%) cut in January. This expectation aligns with a cautiously optimistic outlook for Canada’s economy. However, Lee warned that the BoC may hold off on deeper cuts due to signs that previous measures are beginning to take effect.

While inflation has moderated and economic activity is showing signs of improvement, experts remain divided on the projected rate trajectory for 2025.

Claire Fan, RBC economist, described the outlook as one of “cautious optimism,” citing the positive impact of a recent tax holiday and a declining inflation rate.

Implications for Canadians

For Canadian households, the BoC’s rate decision will directly affect borrowing costs, mortgage rates, and overall consumer spending. With many mortgage renewals on the horizon, a lower interest rate could ease financial strain for families. Businesses, meanwhile, may benefit from improved access to credit, fostering growth and investment opportunities.

On a broader scale, the decision will shape Canada’s long-term economic resilience and global competitiveness. As Figueiredo noted, easing efforts could sustain economic activity through these uncertain times. However, challenges like global trade disruptions and economic divergence with the US underscore the need for a careful and measured approach.

Bottom line

As the Bank of Canada prepares for its January 29 rate announcement, it faces a complex economic landscape. With inflation under control, a strong labour market, and external risks like US tariffs, the BoC must balance competing priorities.

This decision marks a pivotal moment for Canada’s economy in 2025, with potential implications for households, businesses, and markets. Staying informed and prepared for these shifts will be critical as the country navigates its path toward economic recovery and resilience. For now, cautious optimism remains the prevailing sentiment among analysts and policymakers alike.