The Bank of Canada lowered its overnight policy rate by 25 basis points this morning from 3 per cent to 2.75 per cent. In the statement accompanying the decision, the Bank noted that trade tensions will slow momentum from robust GDP growth observed in the second half of 2024, though how much the economy might slow is complicated by the uncertainty from a rapidly evolving policy landscape. On inflation, the Bank expects prices to rise slightly above their 2 per cent target as the GST tax break ends and forecasts that core inflation will remain above 2 per cent due to persistently elevated shelter costs.
Thanks to tariffs, the Bank of Canada is faced with heightened uncertainty and an economy that may be set to slow down rather than speed up as was expected just a few months ago. With inflation running at near its 2 per cent target and a labour market that appears to have stalled last month, along with falling population growth, there is a strong argument for policy rates to be even lower, though such a path is complicated by the inflationary impact of retaliatory Canadian tariffs. Indeed, the Bank used its statement to caution that monetary policy cannot offset the impacts of a trade war and that it can and must ensure that higher prices do not lead to ongoing inflation. Given that caution, future cuts to the Banks policy rate will be highly dependent on the evolution of inflation and inflation expectations.
Copyright British Columbia Real Estate Association. Reprinted with permission.
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