This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on January 29, 2025.
This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision-making process. This stage takes place after members have received all staff briefings and recommendations.
Governing Council’s policy decision-making meetings began on January 21, 2025. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Sharon Kozicki, Nicolas Vincent and Rhys Mendes.
International economy
Governing Council members began their deliberations by discussing global economic developments since the October Monetary Policy Report. They estimated the global economy will continue to grow by about 3% over the next two years, consistent with their expectations in October. However, the outlook did not incorporate new tariffs threatened by the United States.
Members discussed the ongoing strength of the US economy. They agreed that fourth-quarter gross domestic product (GDP) was likely to come in stronger than was anticipated in October, largely due to robust consumer spending. Inflation in the United States edged up in the fourth quarter and has proven sticky, due mainly to upward pressure from core services prices. With data suggesting that real wages and productivity were growing at about the same pace, it did not appear that labour costs were feeding into renewed inflationary pressures, and inflation was expected to ease gradually. However, members acknowledged that robust demand and the policy measures of the new US administration posed some upside risks to the inflation outlook.
In the euro area, growth was likely to be subdued at just under 1% in 2025, largely due to weakness in manufacturing. In China, policy measures have contributed to a boost in domestic demand recently. The forecast for growth in 2025 was revised upward as a result. However, the outlook for 2026 still saw growth moderating given structural challenges linked to an aging population and to the property sector.
Global financial conditions had diverged across countries since October. Strong growth prospects and renewed concerns about inflationary pressures had caused US bond yields to rise. In Canada, yields had come down slightly. The Canadian dollar had depreciated materially since autumn, with the US dollar appreciating against most global currencies. Members acknowledged that while some of the depreciation was likely due to the spread between policy rates in Canada and the United States, most of the decline was due to heightened trade uncertainty. Global oil prices had been volatile but generally higher by about $5 in the weeks leading up to the January Report.
Canadian economy and inflation outlook
Governing Council members discussed recent data on economic activity and inflation in Canada.
Members noted that lower interest rates were contributing to renewed household spending, especially on interest-sensitive goods, and that housing market activity had begun to pick up. Growth in consumption per person had turned positive in the third quarter of 2024 and was expected to strengthen further in coming quarters. GDP per person was expected to turn positive in the first quarter of 2025.
In the absence of a trade conflict, members expected to see some strengthening in export growth. Energy exports would be the main source of this growth, as the new capacity created by the Trans Mountain Expansion pipeline is more fully taken up and new export capacity for liquefied natural gas comes online in mid-2025. Members also discussed the possibility that declining competitiveness in non-commodity export sectors could be a drag on export growth despite strong foreign demand.
Given the strengthening in household spending, a gradual pickup in business investment could be expected. However, Governing Council members noted both the general weakness in business investment in recent years and the fact that uncertainty about US tariffs was already affecting business investment decisions.
According to multiple indicators, the job market remained soft. The unemployment rate was 6.7% in December, with new entrants into the labour market—mostly younger workers and newcomers to Canada—finding it particularly hard to get a job. Job gains outpaced labour force growth in December for the first time in more than a year. Members agreed they needed to see this trend over a longer period to be convinced that the labour market was strengthening. Indicators of wage growth presented a somewhat mixed picture. While data from the Survey of Employment, Payrolls and Hours continued to show elevated wage growth, the more recent data from the Labour Force Survey (LFS) showed signs that wage growth was moderating, particularly in the private sector. Members tended to place more weight on LFS measures that controlled for sectoral shifts, in which wage growth in recent months had been lower.
Overall, growth was expected to strengthen further as interest rate cuts continued to work through the economy. With the pace of growth slightly above the growth of potential output in the outlook, excess supply would gradually be taken up over the projection horizon. This growth outlook was lower than had been projected in the October Report, mainly because the federal government’s new immigration targets were assessed as leading to a significant decrease in the projection for population growth. But since slower population growth also led to lower estimates for potential growth, the impact on the output gap’s dynamics and the inflation outlook was limited.
Consumer price index (CPI) inflation was 1.8% in December and had been around 2% since August. Recent volatility caused by the GST/HST holiday temporarily pushed inflation down, but this will unwind in March. Inflation in prices for shelter services remained elevated but was continuing to ease gradually. Members discussed a broad spectrum of indicators of underlying inflation, including various measures of core inflation, the share of components with inflation above 3%, and measures of business and consumer inflation expectations. Members noted that most indicators suggested underlying inflation was about 2%, while the Bank’s preferred measures of core inflation—CPI-median and CPI-trim—were about 2½%. Governing Council members discussed the recent signal coming from the preferred measures of core inflation. They noted that elevated inflation for shelter prices, when combined with the large weight of shelter costs in the CPI basket, appeared to be pushing the preferred measures up higher than alternative measures of core inflation and other indicators. Overall, members agreed that underlying inflation looked to be close to 2%. CPI inflation was forecast to remain around the 2% target over the next two years.
Members agreed that the projection, which did not account for potential new tariffs imposed by the United States on Canadian exports, would need to undergo major revisions if significant, broad-based tariffs were implemented. A protracted trade conflict would most likely lead to weaker GDP and higher prices in Canada.
Considerations for monetary policy
Governing Council members discussed the risks around the base-case projection, which they viewed as reasonably balanced, apart from the possible imposition of wide-ranging tariffs.
In terms of GDP growth, some members highlighted the risk that consumer spending could be stronger than in the January MPR projection due to the high savings rate and lower interest rates. A boost to consumer demand could put upward pressure on inflation. If some of the savings flowed into housing activity, it could push up already elevated inflation for shelter prices. Members expected house prices to increase, but there was no evidence thus far that price increases were accelerating.
Members viewed the impact of prolonged trade uncertainty on business investment and consumer confidence as the main downside risk to the outlook. They discussed this at length. Even if no tariffs were imposed, a long period of uncertainty under the cloud of tariff threats would almost certainly damage business investment in Canada. Members discussed recent survey results from the Business Leaders’ Pulse and anecdotal information that indicated that some businesses were considering shifting investment to the United States. This would likely lead to negative effects on hiring, labour income and household spending.
Governing Council then spent considerable time discussing the channels through which a protracted trade conflict with the United States would affect output and inflation, and the implications for monetary policy.
Members acknowledged that it was impossible to predict what would happen with US trade policy.
Nonetheless, it was clear that a protracted trade conflict would lead to a decline in economic activity. GDP would be lower in both Canada and the United States, but the GDP loss would be significantly larger for Canada because Canada has a more open economy, and its exports are so concentrated with the United States. Governing Council members also noted that the adverse impact on the level of GDP would be permanent, and the growth of GDP would be reduced until the Canadian economy adjusts to the tariffs.
Members also recognized that retaliatory measures by Canada and other countries in response to tariffs would raise the prices of imported consumer and intermediate goods, which would put upward pressure on inflation. While retaliatory tariffs would likely represent a one-time increase in the level of prices, members noted that, given the size of the shock, there was a risk that higher import prices could feed into other prices. If this leads to an increase in inflation expectations, it could generate higher ongoing inflation.
Governing Council members also noted other possible impacts of tariffs with important implications for Canada:
- A global trade conflict would lower global growth, reducing the demand for energy and likely lowering the global price of oil. This would tend to lower inflation, but it would also reduce incomes in Canada, given the country’s large energy export sector.
- A tariff war could also lead to disruptions in supply chains. With the interconnected nature of manufacturing in Canada and the United States, there is considerable scope for supply chain bottlenecks. The impacts of such disruptions would be hard to predict. This could compound the initial shock from tariffs and feed into inflationary pressures.
- Governing Council members reviewed analysis indicating that the recent depreciation in the Canadian dollar largely reflected trade uncertainty. Tariffs could cause the dollar to depreciate further. The extent of the depreciation would depend on how much markets had already accounted for the impact of tariffs. A lower dollar would partially offset the impact of tariffs on Canadian exports, but it would also raise the cost of imports further.
Members exchanged views on several factors that could affect the dynamics of economic activity and prices if the trade conflict were to be long lasting.
First, the hit to business investment could damage the growth prospects of the Canadian economy. Companies were already re-evaluating their investment plans in the face of trade policy uncertainty. With significant tariffs, the risk of capital flight would increase, exacerbating Canada’s competitiveness challenges and low productivity growth. Members were concerned that US tariffs on Canadian exports would add significant pressures on Canadian exporters. Over time, this could lead to business closures and companies exiting the export sector. In the long run, tariffs introduce inefficiencies that weigh on the productive capacity of an economy—meaning lower productivity and lower potential output than in the absence of the tariffs. Members recognized that monetary policy is not able to offset these longer-term implications of a trade conflict. It would only be able to smooth the path in the short-term as the economy transitions to a lower productivity and lower output trajectory.
Second, they discussed the short-run implications for inflation expectations. During the recent period of high inflation, long-term inflation expectations remained well anchored. However, businesses could quickly pass on higher input costs to their customers by raising prices. Also, given Canadians’ recent experience with high inflation, a one-time increase in the price level of tariffed imports could push up short-term inflation expectations. Members agreed that monetary policy would need to guard against second round effects of any initial price level shock coming from higher inflation expectations.
Third, members discussed the potential fiscal responses to the imposition of broad-based tariffs on Canadian exports to the United States. Monetary policy is a blunt instrument that can only support or restrict demand across the whole economy. Fiscal policy, on the other hand, can be much more targeted, providing a cushion to help hard-hit workers and businesses, and help the economy adjust to long-lasting structural changes brought about by a protracted trade conflict. The impact of fiscal measures on economic activity and inflation would depend on the form, scope and duration of the fiscal response. Members agreed to incorporate new fiscal measures in their analysis as those measures are announced.
Members agreed that in setting monetary policy, they would need to consider the downward pressure on inflation from weakness in the economy and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions. But with considerable uncertainty about the timing and magnitude of these effects, Governing Council members acknowledged that assessing and balancing the impacts of these forces on output and inflation would be a dynamic process. In other words, in setting monetary policy, they would need to continuously gauge the effects of a trade conflict in real time as new developments unfolded.
Given the high degree of uncertainty, members agreed that they would need to assess a wide range of incoming data on economic activity and prices. This includes information on supply chains and the links between sectors, and more frequent and detailed surveys to generate insights into how businesses and households adjust to the changing landscape.
Overall, Governing Council members agreed that monetary policy cannot offset the long-term economic adjustment that permanent tariffs would cause. And in the short run, monetary policy cannot lean against lower growth and higher inflation at the same time. But having restored low inflation and reduced the policy interest rate substantially, monetary policy is better positioned to help smooth the economy’s adjustment to a tariff shock.
Policy decision
Governing Council members were encouraged that recent indicators pointed to some pick up in economic activity. With inflation around 2% and the economy in excess supply, they wanted to see this pick up sustained to take up slack and keep inflation close to 2%. Members agreed that a 25 basis point cut would be helpful to support growth and better balance inflation risks.
Members also agreed that the threat of tariffs had increased uncertainty, and this would weigh on business confidence and investment intentions, as well as consumer sentiment. Members agreed that this also supported the case for a lower policy rate.
Governing Council therefore decided to reduce the policy interest rate by a further 25 basis points to 3%.
Members discussed whether to provide any guidance on the future path for the policy interest rate in its communications. They agreed that given the high level of uncertainty surrounding the outlook, and the wide range and complexity of potential trade conflict scenarios, that it would not be appropriate to do so at this decision. Members agreed that it would be important to provide Canadians with their updated analysis and assessments of the impact of a trade conflict on the economy and inflation as it unfolds.
Following a speech by Deputy Governor Toni Gravelle earlier in January, which explained that the Bank would be ending quantitative tightening in 2025, members also discussed the best timing to restart asset purchases. To smooth the transition toward normal balance sheet management, and to reduce uncertainty by providing market participants with a clear timeline, Governing Council decided that asset purchases would begin on March 5, 2025, starting with term repo (repurchase agreement) operations. The steady-state level of settlement balances is expected to stabilize within a range of around $50–70 billion over the course of the year. Routine asset purchases will serve to match the normal growth in liabilities—mainly currency in circulation—on the Bank’s balance sheet. Governing Council members stressed that this decision was not related to the threat of tariffs. It reflected the cumulative run-off of its balance sheet and their assessment of the steady-state level of settlement balances.
Finally, Governing Council decided that the deposit rate would be set five basis points below the policy interest rate. This change would improve the effectiveness of monetary policy implementation. By incentivizing the circulation of settlement balances among financial market participants, the lower deposit rate should support the functioning of short-term funding markets and help relieve some of the upward pressure that has been seen in the overnight rate. Governing Council members agreed that the Bank will assess the impacts of this change and may make occasional adjustments to its monetary policy implementation framework as needed. Any further adjustments will be announced through market notices.