Here's what economists expect the Bank of Canada to do in 2025

Economists at Canada’s major banks don’t expect interest rates to move quite as dramatically in 2025 as they did in 2024, but they still see various sources of drama for the economy and Canadians.

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 GDP have 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 what analysts had expected, Statistics Canada said advance estimates showed that 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 “there's nothing in these figures to change the BoC's more gradual rate-cut narrative.” (Following the BoC’s December cut, BMO projected the overnight rate hitting 2.5 per cent by mid-2025.)

RBC economists project the overnight rate will eventually reach two per cent, a level that economist Abbey Xu wrote “is warranted to allow economic growth to strengthen and prevent inflation from falling significantly below the central bank’s two per cent target.”

Marginal rate relief is still therefore needed, even if we’re justifiably past the days of 50 basis point rate cuts.

Daren King, National Bank of Canada

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: the “mortgage renewal wall,” in which a significant proportion of mortgage holders renew at higher rates, reducing their disposable income; lower population growth brought on by recently introduced 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 wrote that Canada’s Q4 GDP “is still not growing above its long-run potential — something that is needed to close the output gap and reduce unemployment.”

National Bank’s King spelled out the challenge facing the BoC given the output gap. “And remember, it’s not just on-potential GDP growth the BoC is after,” he wrote. “They want to ‘absorb the unused capacity in the economy’ which, by definition, requires the economy to operate above potential for some time. The economy is not at this point yet. Marginal rate relief is therefore still needed, even if we’re justifiably past the days of 50 basis point rate cuts."

Source: Yahoo Finance