This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on March 12, 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 March 7, 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 January Monetary Policy Report. The discussion focused on recent economic developments in light of shifting trade policies.
Economic growth in the United States was weaker than expected in the last quarter of 2024, slowing to 2.3%. A contraction in business investment drove the slowdown, despite consumption growing at a strong rate of 4.2%. Members noted that the US economy showed signs it could slow further in the first quarter of 2025.
Members indicated that the impacts of policy announcements from the US administration were starting to become visible in surveys of households’ and businesses’ sentiment but had not yet materialized in macroeconomic data. Meanwhile, progress on inflation was slow, with the US personal consumption expenditures price index moving from 2.3% in the third quarter of 2024 to 2.5% in the fourth quarter and remaining at 2.5% in January 2025.
Growth in the euro area was modest in late 2024. Recent announcements in Germany to enable higher borrowing to fund defence and infrastructure investments could boost the German economy and strengthen the outlook for the region. But it would likely take time to ramp up any new spending. Apart from the sharp rise in natural gas prices over the winter, inflation in the euro area was expected to continue easing broadly in line with the projection in the January Report.
In China, growth strengthened to 6.6% in the last quarter of 2024, supported by government policies. Although China is committed to a 5% growth target again for 2025, growth in gross domestic product (GDP) is expected to moderate below 5% as the exceptional pace of exports slows. US tariffs are also expected to have some impact on China’s export growth.
Bond yields had declined, easing financial conditions, largely due to market expectations of lower growth in North America. Equity prices had fallen due to slower growth expectations and higher equity risk premiums related to tariff uncertainty. The value of the Canadian dollar had remained broadly unchanged at around 69 to 70 cents US since the January Report but had depreciated against most other major currencies. Oil prices had been volatile, trading below the assumptions in the January Report, while other commodity prices had increased as a result of weather effects and tariff uncertainty. Brent oil was trading near US$70 per barrel.
Canadian economy and inflation outlook
Governing Council members discussed recent data on economic activity and inflation in Canada. They noted that the Canadian economy entered 2025 in a solid position, with robust GDP growth and inflation close to 2% since last summer.
Canada’s GDP grew by 2.6% in the fourth quarter of 2024, led by surprisingly strong household spending, business investment and exports. Supported by past interest rate cuts, final domestic demand grew by a solid 5.6% in the fourth quarter, and business investment increased by 6.5%. Members also noted the significant upward revisions to GDP growth for the third quarter of last year, from 1% to 2.2%.
Members were generally encouraged by developments in the labour market since November, noting that growth in employment had strengthened through January, surpassing labour force growth. Job growth stalled in February and the unemployment rate remained at 6.6%. Wage growth continued to show signs of moderation.
Trade tensions and the imposition of tariffs were expected to disrupt a recovery in the labour market. Members noted a decline in job postings. Recent Bank survey results indicated that businesses intended to reduce the pace of hiring in the near term.
Members also discussed the impact of tariff threats on trade. Merchandise trade data for January suggested that businesses on both sides of the border were pulling forward purchases ahead of possible tariffs. This was expected to lead to stronger Canadian exports and imports in the first quarter, with exports rising more than imports. Businesses appeared to be drawing down inventories to meet the demand for exports. This could offset some of the positive contribution of export growth in the first quarter of 2025.
Initial results from recent Bank surveys suggested that intensifying trade tensions and pervasive uncertainty were hurting confidence and leading consumers to be more cautious. A planned increase in precautionary savings was noted along with a shift in consumers’ spending plans for major purchases. Members agreed that these changes in sentiment likely pointed to weaker consumption growth in early 2025.
The Bank’s surveys also indicated that trade uncertainty was prompting businesses to revise down their sales outlooks, especially in manufacturing and sectors dependent on discretionary consumer spending. Many businesses reported scaling back their investment plans and hiring intentions. In addition, businesses were facing higher costs as imported machinery and equipment had become more expensive due to the depreciation of the Canadian dollar since last autumn. Businesses also reported incurring new costs to diversify their markets and suppliers.
Consumer price index (CPI) inflation was 1.9% in January, slightly firmer than expected in the January Report, mostly reflecting strength in prices for goods. Excluding the effect of taxes, CPI inflation was 2.6% in January. Governing Council members expected CPI inflation to be about 2.5% in March, after the GST/HST holiday ends.
Inflation in shelter prices had remained elevated but continued to ease. Members noted that shelter services was the only major component where inflation was above its historical average, while inflation in the other CPI components was generally at or below historical averages. Core measures of inflation remained on the high side with both CPI-median and CPI-trim at 2.7% in January, mainly due to persistently high inflation in shelter prices.
Merchandise trade data indicated that the costs of imported goods and intermediate inputs had increased. This could partly be due to a weaker Canadian dollar, the impact to supply chains of tariffs on other countries and increases in contract prices as businesses account for possible tariffs. Members expected inflation in prices for food and other goods would pick up even more if further tariffs were imposed, but they expected inflation in prices for services to slow, mainly due to declines in mortgage interest costs and rent inflation.
Considerations for monetary policy
Governing Council members discussed various factors as they weighed the current decision and the path for monetary policy. They focused their conversation on the risks to growth and inflation brought on by the threat of tariffs and pervasive uncertainty about the Canada-US trade relationship.
Governing Council agreed the economy was starting the year in a stronger position than expected. Growth in the second half of 2024 was considerably stronger than anticipated at the time of the January Report. Members exchanged views on possible contributing factors to this strength. Those included potentially more robust economic fundamentals and a faster-than-usual transmission of monetary policy. This more robust growth path generally reinforced members’ views that interest rate cuts through the second half of 2024 had been effective in boosting household spending and economic growth. Given the economy was on a stronger-than-expected footing at the beginning of 2025, Governing Council members were generally assigning less weight to downside risks to inflation.
Members turned their attention to the impact of trade tensions on the behaviour of businesses and households. Members acknowledged that surveys of consumer and business confidence had shifted sharply lower. There was a discussion about how much weaker confidence would translate into lower spending and investment. Members recognized that the relationship between confidence and actual spending was not always tight and there had been periods when confidence weakened but spending had held up. This led some members to be cautious about reading too much into survey results about confidence. Other members stressed the consistency and size of the decline in consumer and business confidence across a range of surveys, including the Bank’s. They noted these surveys were also consistent with more anecdotal evidence that consumers and businesses were pulling back on spending.
Members agreed that it was too early to see the impact on economic activity, but that the shift in sentiment was likely to translate into a slowing in domestic demand going forward. How much of a slowing was hard to say but they recognized it could be considerable.
The softness in domestic demand was expected to be somewhat offset by the pulling forward of exports in the first quarter of 2025. However, this surge in exports would likely be followed by weaker exports in the following quarters. This is particularly the case if, in addition to tariffs on steel and aluminum, tariffs are imposed on broader categories of goods. Members agreed that the slowdown in exports combined with the expected weakening in domestic demand from restrained spending would likely weigh further on economic activity in the second quarter.
Inflation in Canada had been close to the 2% target since last summer. Members noted that the impacts of uncertainty and tariffs on inflation were particularly difficult to assess. Weaker domestic demand would put downward pressure on inflation, and new tariffs would hurt exports and further weaken business investment. At the same time, rising costs from tariffs, a weaker Canadian dollar and trade uncertainty would put upward pressure on inflation.
Members discussed whether they were seeing early signs of inflationary pressures coming from higher input costs related to tariffs and uncertainty. They agreed it was too early to see these impacts in the CPI data. They noted that the extent and speed of the pass-through to consumer prices was uncertain and will require careful tracking. They also discussed the rise in short-term inflation expectations since the January Report. Members attributed the increase to broad public awareness that tariffs would lead to price increases. They agreed to closely monitor the evolution of medium- and long-term inflation expectations, as anchored expectations are key to ensuring that any rise in inflation is temporary.
Finally, members reflected on the considerable amount of uncertainty surrounding the outlook. Sources of uncertainty include the evolution of the trade conflict, responses by governments, businesses’ pricing and investment behaviour, and changes in consumer spending. How all these forces interact and impact the economy can only be assessed over time as information becomes available. Members noted that the situation was complex and fluid. Still, what seemed most likely was that the trade conflict would weigh on economic activity while also increasing inflationary pressures.
Policy decision
Governing Council members discussed whether maintaining the policy interest rate at 3% or reducing it by 25 basis points was most appropriate for this decision.
Members started by acknowledging that economic growth was robust heading into 2025, and that inflation had remained close to 2% since the summer. They also recognized that monetary policy easing had been substantial and past interest rate cuts were still working their way through the economy.
While members expressed some differences on how the unexpected economic strength in the second half of 2024 influenced their assessment of risks, there was general agreement that the new data had shifted the balance, with somewhat less risk of lower inflation outcomes. They agreed that, in the absence of tariff threats and elevated uncertainty, the decision would probably have been to maintain the policy interest rate at 3%.
Some members suggested that it could still be appropriate to maintain the policy rate at 3% until there is more clarity around tariffs and more information about their macroeconomic impact. While uncertainty was affecting spending intentions, the economy was not yet confronted with broad-based tariffs and interest rates had already been reduced substantially.
Other members suggested that the threat of tariffs and uncertainty had changed the outlook enough to warrant a further reduction in the policy rate. Tariffs on steel and aluminum and threats of additional tariffs, compounded with the unpredictability of the US administration, were already affecting the economic decisions of consumers and businesses and this was significantly weakening the near-term outlook.
Governing Council members considered the balance of risks between reducing and maintaining the rate. Governing Council agreed that underlying inflation looked to be close to 2%. Inflationary pressures were not broad based and inflation in shelter prices, while still elevated, continued to come down gradually. With the outlook clearly weakening and inflation looking well contained, Governing Council decided to reduce the policy interest rate 25 basis points to 2.75%. This would provide some help to Canadians to manage the uncertainty related to tariffs.
Members agreed that, given the fluidity of the situation, the complexity of the shock and the considerable amount of uncertainty around the outlook, it would not be appropriate to provide guidance on the future path for the policy interest rate.
They committed to monitoring developments closely. Members will assess the balance between the upward pressures on inflation from higher costs and the downward pressures from weaker demand as the situation evolves and data become available. They noted it could take time for these opposing effects to materialize.
Governing Council members recognized that some prices will rise as a result of tariffs and retaliatory measures. They agreed that monetary policy will need to ensure that the initial price increases do not spread to other goods and services and become generalized, ongoing inflation.
Governing Council agreed to proceed carefully with further changes to monetary policy.