What Will Be the Bank of Canada’s Rate Cuts in 2025?

After the Bank of Canada lowered interest rates five times this year, investors and consumers can expect more such moves in 2025. However, analysts say the Bank’s pace of easing will likely be much more modest next year.

The Bank cut rates at five consecutive meetings between June and December, bringing its key overnight interest rate down from its peak of 5.00% to 3.25%—the top end of its neutral range of 2.25%-3.25%.

Despite the significant cuts, analysts point out that the job is unfinished, demonstrated by core inflation measures like stubbornly high energy prices, rising rental expenses, and growth in mortgage rate costs, which continue to drive price pressures. Economists also highlight several ongoing challenges, including persistent slack in the economy, an elevated unemployment rate, and the uncertainty surrounding potential US tariffs under the incoming Trump presidential administration.

A More Cautious Approach to Rate Cuts

Effects of the central bank’s policy moves have started to manifest in certain interest-rate-sensitive sectors of the economy, evidenced by the rekindling of consumer spending and the housing market.

With the policy rate now substantially lower than in the first half of 2024, the Bank hinted at a more gradual approach to monetary policy. In its most recent policy announcement, officials said they will be “evaluating the need for further reductions in the policy rate one decision at a time.”

Against this backdrop, “we expect the Bank of Canada to maintain a data-dependent framework on future rate decisions,” says Rachel Siu, head of Canadian fixed-income strategy at BlackRock. Markets are currently pricing in two or three additional rate cuts in 2025, which she says is “in line with our base case, as we expect the economy to continue moderating and for inflation to average near the 2% target.”

Desjardins macro strategist Tiago Figueiredo forecasts that by the end of 2025, the central bank will have lowered its policy rate to 2.25%, the bottom of its neutral range. The Bank is shifting from a restrictive policy aimed at cooling inflation to a more balanced approach that supports sustainable growth. “I think that amount of easing should be enough to weather the storm from upcoming mortgage renewals and should see economic activity increase,” he says.

BMO senior economist Jennifer Lee anticipates a more gradual approach. “With the latest cut, the policy rate hits the top of the neutral range, which the Bank estimates is 2.25% to 3.25%,” she wrote in a note to investors. “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).” BMO economists project quarter-point cuts in March, June, and sometime in the third quarter, bringing the rate to a low of 2.5%, where they expect it to stay for the remainder of the year.

Are More Aggressive Cuts Possible?

Some analysts see the Bank of Canada cutting more aggressively in 2025. Charles St-Arnaud, chief economist at Alberta Central, says the central bank may need to cut as many as five times to get to the lowest level of its monetary easing cycle. “We expect a terminal rate of 2% by the fall of 2025, implying a further 125-basis-point reduction in the policy rate, supported by our expectations that inflation will remain consistent with the Bank of Canada’s target,” he says. He forecasts a quarter-point cut at each meeting until it reaches 2.5% in April 2025, and that “subsequently, the Bank of Canada will cut two more times, in July and October.”

The projected cuts reflect the need to support economic growth by addressing lingering economic slack and ensuring a sustained recovery. In a note to investors, Morgan Stanley economist Lenoy Dujon predicts that “the Bank will move its policy rate into accommodative territory by lowering it to 2%, below its current estimate of neutral and further than implied by market pricing.”

Notably, the Canadian economy saw a larger-than-expected spike of 0.3% in October, according to Statistics Canada’s October GDP report, although data showed the economy likely contracted in November. The fourth-quarter GDP is still tracking slightly below the Bank of Canada’s Monetary Policy Report projection and the economy’s long-run potential, according to Andrew Grantham, senior economist at CIBC Economics. “Because of that, we continue to forecast a 25-basis-point rate cut at the January meeting, and a low of 2.25% for the overnight rate in 2025,” he wrote in an investor note.

Wildcards in the Outlook

Analysts say the main risk to the current easing path would be the incoming Trump administration in the US imposing steep tariffs on Canadian exports. Things would worsen if Canada were to retaliate with similar taxes on US imports. Trade battles could mean significantly more or fewer interest rate cuts. “In both scenarios, the Bank of Canada would cut its policy rate to support growth and look through the temporary inflationary impacts of tariffs and the associated Canadian dollar depreciation on inflation,” says St-Arnaud.

He explains that without retaliation, the central bank would likely cut its policy rate in response to lower production levels. In the case of retaliation, the Bank would hike its policy rate to respond to higher inflation. However, he adds that any inflation would be temporary (similar to a tax hike), and policymakers would likely focus on permanent output losses instead of short-term inflation.

Nick Rees, senior foreign exchange market analyst at Monex Canada, contends that Trump’s tariffs would devastate the economy. “If he delivers a 25% day-one levy on all Canadian exports, as promised, this would tip the Canadian economy into a deep recession, warranting aggressive policy easing,” he says. However, if Canada secures an exemption, that “would favor Canadian economic outperformance and as such, [require] minimal further rate cuts.”

Roughly 75% of Canadian exports are destined for the United States, and 30 states have Canada as their top trading partner. “Two million Canadian jobs are directly or indirectly impacted by trade with the US, and the negative impact of higher tariffs could result in the Bank of Canada easing faster,” explains Ashish Dewan, senior investment strategist at Vanguard Canada.

In contrast, Siu strikes a more optimistic tone: “Our view is that the ultimate implementation will likely be more moderate than the initial headline, but the uncertainty can weigh on businesses and investment spending.”

David Doyle, head of economics at Macquarie Group, points to another big risk that could force policymakers to ease more aggressively. He expresses concern over “the potential disinflation that could flow from the federal government’s immigration policy U-turn.”

Ottawa’s immigration clampdown could trigger a broader economic slowdown, increasing the risk of a recession in 2025. And Dewan identifies a global slowdown in economic growth, geopolitical tensions, and rising unemployment (particularly as population growth outpaces job creation) as other risks that could induce the Bank of Canada to continue easing.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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