Bank of Canada reduces policy rate; ends quantitative tightening

The Bank of Canada has announced a reduction in its target for the overnight rate to 3%, with the Bank Rate set at 3.25% and the deposit rate at 2.95%. This decision marks an end to quantitative tightening as the Bank plans to normalize its balance sheet. Asset purchases will resume in early March, starting gradually to stabilize and modestly grow the balance sheet in line with economic growth.

The January Monetary Policy Report (MPR) highlights significant uncertainty due to potential trade tariffs from the new U.S. administration. The MPR provides a baseline forecast without considering new tariffs, projecting global economic growth of about 3% over the next two years. Growth expectations for the United States have been revised upward due to stronger consumption, while growth in Europe remains subdued due to competitiveness pressures.

In Canada, past interest rate cuts are boosting consumption and housing activity, although business investment is weak. The labor market shows improvement with job growth strengthening despite a soft unemployment rate of 6.7% in December.

The Bank forecasts GDP growth will strengthen in 2025 but will be moderate due to slower population growth linked to reduced immigration targets. CPI inflation remains close to 2%, with shelter price inflation easing gradually.

With inflation around 2% and excess supply in the economy, the Governing Council decided on a further policy rate reduction by 25 basis points. Lower rates are expected to boost household spending and support gradual economic strengthening while maintaining inflation near target levels.

Effective January 30, adjustments will be made to improve monetary policy implementation by setting the deposit rate at five basis points below the policy interest rate. This aims to enhance settlement balance circulation and short-term funding market functioning.

The Bank is also realigning its framework for Overnight Reverse Repo operations effective January 30, introducing uniform price auctions with specified cash value amounts and dealer limits.

Starting March 5, asset purchases will include term repo program restarts followed by Government of Canada treasury bill purchases later this year based on balance sheet evolution needs.