The Bank of Canada today reduced its target for the overnight rate to 3%, with the Bank Rate at 3.25% and the deposit rate at 2.95%.1 The Bank is also announcing its plan to complete the normalization of its balance sheet, ending quantitative tightening. The Bank will restart asset purchases in early March, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy.2

Projections in the January Monetary Policy Report (MPR) published today are subject to more-than-usual uncertainty because of the rapidly evolving policy landscape, particularly the threat of trade tariffs by the new administration in the United States. Since the scope and duration of a possible trade conflict are impossible to predict, this MPR provides a baseline forecast in the absence of new tariffs.

In the MPR projection, the global economy is expected to continue growing by about 3% over the next two years. Growth in the United States has been revised up, mainly due to stronger consumption. Growth in the euro area is likely to be subdued as the region copes with competitiveness pressures. In China, recent policy actions are boosting demand and supporting near-term growth, although structural challenges remain. Since October, financial conditions have diverged across countries. US bond yields have risen, supported by strong growth and more persistent inflation. In contrast, yields in Canada are down slightly. The Canadian dollar has depreciated materially against the US dollar, largely reflecting trade uncertainty and broader strength in the US currency. Oil prices have been volatile and in recent weeks have been about $5 higher than was assumed in the October MPR.

In Canada, past cuts to interest rates have started to boost the economy. The recent strengthening in both consumption and housing activity is expected to continue. However, business investment remains weak. The outlook for exports is being supported by new export capacity for oil and gas.

Canada’s labour market remains soft, with the unemployment rate at 6.7% in December. Job growth has strengthened in recent months, after lagging growth in the labour force for more than a year. Wage pressures, which have proven sticky, are showing some signs of easing.

The Bank forecasts GDP growth will strengthen in 2025. However, with slower population growth because of reduced immigration targets, both GDP and potential growth will be more moderate than was expected in October. Following growth of 1.3% in 2024, the Bank now projects GDP will grow by 1.8% in both 2025 and 2026, somewhat higher than potential growth. As a result, excess supply in the economy is gradually absorbed over the projection horizon.

CPI inflation remains close to 2%, with some volatility due to the temporary suspension of the GST/HST on some consumer products. Shelter price inflation is still elevated but it is easing gradually, as expected. A broad range of indicators, including surveys of inflation expectations and the distribution of price changes among components of the CPI, suggests that underlying inflation is close to 2%. The Bank forecasts CPI inflation will be around the 2% target over the next two years.

Setting aside threatened US tariffs, the upside and downside risks around the outlook are reasonably balanced. However, as discussed in the MPR, a protracted trade conflict would most likely lead to weaker GDP and higher prices in Canada.

With inflation around 2% and the economy in excess supply, Governing Council decided to reduce the policy rate a further 25 basis points to 3%. The cumulative reduction in the policy rate since last June is substantial. Lower interest rates are boosting household spending and, in the outlook published today, the economy is expected to strengthen gradually and inflation to stay close to target. However, if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested. We will be following developments closely and assessing the implications for economic activity, inflation and monetary policy in Canada. The Bank is committed to maintaining price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is March 12, 2025. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on April 16, 2025.

Bank of Canada announces an adjustment to the deposit rate and some changes to terms and conditions for Overnight Reverse Repo Operations

January 29, 2025

The Bank announced it is making an adjustment to the deposit rate. Effective January 30, the deposit rate will be set at a spread of 5bps below the Bank’s policy interest rate. This change to the monetary policy implementation framework is being made to improve its effectiveness. The intent of this change is to improve the circulation of settlement balances as they decline towards steady state levels over the coming months and support the functioning of short-term funding markets. Adjusting the deposit rate should also help mitigate some of the upward pressure that has been seen on the overnight rate relative to the Bank’s target rate in recent months and help reinforce the effect of the Bank’s Overnight Repo (OR) operations.

Occasional adjustments to the deposit rate spread may be required in the course of normal operations. These spread adjustments would be considered, among other factors, following a period of sustained and persistent upward, or downward pressure, on CORRA and would be communicated via a market notice. We will assess the impact of this change as the balance sheet continues to evolve and evaluate the need for any additional adjustments to our implementation framework.

In addition, the Bank is realigning its framework for Overnight Reverse Repo (ORR) operations with that of OR operations. Effective January 30, when they are required, ORR operations will be conducted through a uniform price auction with an aggregate cash value amount offered in each operation of a minimum of $8 billion and individual dealer limits for each ORR of $3 billion. The terms and conditions of ORR operations have been updated to reflect this change and provide further operational details.

Director
Financial Markets Department

Director
Financial Markets Department

Bank of Canada provides operational details for restarting asset purchases to end quantitative tightening

January 29, 2025

Today, the Bank of Canada is announcing its plan to complete its balance sheet normalization, ending quantitative tightening. Beginning in early March, the Bank will begin purchasing assets as part of normal balance sheet management. Purchases are intended to replace maturing assets, to offset the growth of currency notes in circulation and to stabilize settlement balances within a range over the course of the year. 

Asset purchases will begin with the restart of the regular term repo program, followed by Government of Canada (GoC) treasury bill purchases to restore a more balanced mix of assets on the Bank’s balance sheet.

As such, the Bank will restart its term repo program effective March 5, 2025 and operations will be conducted every two weeks. Terms will alternate between 1-month operations and 1- and 3-months operations depending on the week. Initially, term repo operations will range between $2bln and $5bln. The sizes will increase over time as the Bank’s needs for additional assets grow. Final operational details, including the size and specific maturity date of the term repos, will be published one week prior to the operation date. See the updated terms and conditions for additional information.

Treasury bill purchases will resume later this year and be conducted via GoC auctions. Purchase amounts will be announced via the regular call for tender process. The timing for the resumption of treasury bill purchases will ultimately depend on the evolution of the Bank’s balance sheet, including take-up of the term repo program. 

Purchases of GoC bonds will likely not need to start until towards the end of 2026 at the earliest based on current projections for the Bank’s future asset needs. When they begin, they will be conducted in the secondary market. A subsequent market notice containing operational details will be published well in advance.

Director
Financial Markets Department

Director
Financial Markets Department