Inflation, labour market and Trump threats all hovered over central banks’ January move
By Fergal McAlinden
29 Jan. 2025
The Bank of Canada has lowered its benchmark rate again, making a sixth consecutive cut amid continuing signs of a slowing economy and falling inflation.
The central bank said on Wednesday morning that it had trimmed the key rate by 25 basis points, a move that brings it to 3% but also marks a smaller reduction than its previous two cuts.
That decision arrives after the annual inflation rate dropped to 1.8% in December, just below the Bank’s 2% target, spurred in large part by the federal government’s temporary GST break.
Without that tax break, overall inflation would have jumped to 2.3% – but while the labour market appeared to strengthen in December, adding a better-than-expected 91,000 jobs, the threat of tariffs on Canada by new US president Donald Trump kept a January rate cut firmly on the table.
Bank decisionmakers slashed rates by 50 points in both October and December, with governor Tiff Macklem describing Trump’s tariff threats as a “major new source of uncertainty” last month and underlining the potential they posed for significant disruption to both the US and Canadian economies.
The president has doubled down on threats to introduce tariffs on Canadian goods crossing into the US, saying he’ll impose the measures beginning on February 1 in line with similar levies against Mexico.
Economists have warned of the huge negative impact that move could have on the Canadian economy, although whether or not Trump plans to follow through with the threat remains unclear.
Bank of Canada’s benchmark continues to tumble from 23-year high
The Bank of Canada’s benchmark rate has now fallen by a full two percentage points since the middle of last year. The central bank introduced a flurry of rate hikes throughout 2022 and 2023 in a bid to curb a spike in inflation – and after holding that rate steady at 5.0% for nearly a year, its highest level since 2001, it began cutting last June.
Macklem indicated in December that the Bank was likely to begin moving at a more cautious pace in 2025, although Trump’s threats could now weigh heavily in the central bank’s thinking as it maps out its approach for the months ahead.
The Bank is scheduled to announce its next decision on rates on March 29, followed by six further decisions throughout the year.