Monetary Policy Report—January 2025
Economic growth in Canada is expected to pick up, supported by past interest rate cuts, and inflation is projected to remain close to the 2% target.
The projection does not incorporate any new US tariffs (see In focus: Evaluating the potential impacts of US tariffs). Reflecting increased uncertainty about US trade policy, the outlook embeds a modest negative impact on business investment.
Compare recent Bank projections
Canadian projection
Growth in gross domestic product (GDP) is expected to average 1.8% over the projection horizon.
| 2023 | 2024 | 2025 | 2026 | |
|---|---|---|---|---|
| Consumption | 1.0 (0.9) | 1.1 (1.2) | 1.3 (0.7) | 0.9 (1.1) |
| Housing | -0.7 (-0.9) | -0.1 (0.0) | 0.5 (0.5) | 0.2 (0.5) |
| Government | 0.6 (0.5) | 0.7 (0.7) | 0.5 (0.6) | 0.4 (0.4) |
| Business fixed investment | 0.2 (-0.1) | -0.1 (-0.1) | 0.1 (0.4) | 0.2 (0.5) |
| Subtotal: final domestic demand | 1.1 (0.5) | 1.6 (1.8) | 2.4 (2.2) | 1.7 (2.5) |
| Exports | 1.6 (1.8) | 0.3 (0.4) | 0.6 (1.5) | 0.8 (1.0) |
| Imports | -0.1 (-0.3) | -0.2 (-0.2) | -0.7 (-1.1) | -0.8 (-1.2) |
| Inventories | -1.1 (-0.8) | -0.4 (-0.8) | -0.5 (-0.5) | 0.1 (0.0) |
| GDP | 1.5 (1.2) | 1.3 (1.2) | 1.8 (2.1) | 1.8 (2.3) |
| Memo items (percentage change): | ||||
| Range for potential output | 1.4–3.2 (1.4–3.2) | 2.1–2.8 (2.1–2.8) | 1.1–2.4 (1.1–2.4) | 0.9–2.2 (0.9–2.2) |
| CPI inflation | 3.9 (3.9) | 2.4 (2.5) | 2.3 (2.2) | 2.1 (2.0) |
- * Numbers in parentheses are from the projection in the previous Report.
- † Numbers may not add to total due to rounding.
Sources: Statistics Canada and Bank of Canada calculations and projections
Quarterly projection
Inflation is forecast to stay close to the 2% target over the projection.
| 2024 | 2025 | 2023 | 2024 | 2025 | 2026 | ||||
|---|---|---|---|---|---|---|---|---|---|
| Q2 | Q3 | Q4 | Q1 | Q4 | Q4 | Q4 | Q4 | ||
| CPI inflation (year-over-year percentage change) | 2.7 (2.7) |
2.1 (2.1) |
1.9 (2.1) |
2.1 |
3.3 (3.3) |
1.9 (2.1) |
2.4 (2.0) |
2.1 (2.0) |
|
| Core inflation (year-over-year percentage change)† | 2.9 (2.8) |
2.5 (2.5) |
2.6 (2.3) |
2.5 |
3.5 (3.4) |
2.6 (2.3) |
2.1 (2.1) |
2.1 (2.0) |
|
| Real GDP (year-over-year percentage change) | 1.1 (0.9) |
1.5 (1.4) |
1.8 (1.8) |
1.7 |
1.2 (1.0) |
1.8 (1.8) |
1.9 (2.3) |
1.7 (2.3) |
|
| Real GDP (quarter-over-quarter percentage change at annual rates)‡ | 2.2 (2.1) |
1.0 (1.5) |
1.8 (2.0) |
2.0 |
|||||
- * See details on the key inputs to the projection. Numbers in parentheses are from the projection in the previous Report.
- † Core inflation is the average of CPI-trim and CPI-median.
- ‡ At the time the projection was conducted, 2024Q4 and 2025Q1 are the only quarters over the projection horizon where indicators exist to help inform real GDP growth. For longer horizons, fourth-quarter-over-fourth-quarter percentage changes are presented. They show the Bank’s projected growth rates of CPI and real GDP within a given year. As such, they can differ from the growth rates of annual averages shown in Table 1.
Sources: Statistics Canada and Bank of Canada calculations and projections
Global projection
The global economy is forecast to grow at around 3% in 2025 and 2026 (Chart 26).
| Projected growth* (%) | |||||
|---|---|---|---|---|---|
| Share of real global GDP† (%) | 2023 | 2024 | 2025 | 2026 | |
| United States | 15 | 2.9 (2.9) |
2.8 (2.8) |
2.6 (2.4) |
2.3 (2.2) |
| Euro area | 12 | 0.5 (0.5) |
0.7 (0.7) |
0.8 (1.2) |
1.3 (1.6) |
| Japan | 3 | 1.5 (1.7) |
-0.2 (-0.1) |
1.2 (1.3) |
1.1 (1.0) |
| China | 19 | 5.2 (5.2) |
5.0 (4.6) |
4.9 (4.3) |
4.1 (4.1) |
| Oil-importing EMEs‡ | 34 | 4.0 (3.9) |
3.7 (3.7) |
3.8 (4.0) |
4.1 (4.0) |
| Rest of the world§ | 17 | 1.6 (1.4) |
2.1 (2.0) |
2.1 (2.2) |
2.5 (2.2) |
| World | 100 | 3.2 (3.2) |
3.1 (3.0) |
3.1 (3.1) |
3.1 (3.0) |
- * Numbers in parentheses are projections used in the previous Report.
- † Shares of gross domestic product (GDP) are based on International Monetary Fund (IMF) estimates of the purchasing-power-parity valuation of country GDPs for 2023 from the IMF’s October 2024 World Economic Outlook. The individual shares may not add up to 100 due to rounding.
- ‡ The oil-importing emerging-market economies (EMEs) grouping excludes China. It is composed of large EMEs from Asia, Latin America, the Middle East, Europe and Africa (such as India, Brazil and South Africa) as well as newly industrialized economies (such as South Korea)
- § Rest of the world is a grouping of other economies not included in the first five regions. It is composed of oil-exporting EMEs (such as Russia, Nigeria and Saudi Arabia) and other advanced economies (such as Canada, the United Kingdom and Australia).
Sources: National sources via Haver Analytics, and Bank of Canada calculations and projections
Changes to the projection
The following changes have been made to the Canadian and global economic projections, reflecting new information since the October Report.
Global outlook
The outlook for global growth is broadly in line with the October Report, although the composition has changed. Growth in the United States and China is revised up, while it is revised down in the euro area and some emerging-market economies.
- Growth in US GDP is revised up in 2025 and 2026, partly due to the net impact of:
- stronger momentum in consumption and government spending;
- the assumed extension of expiring provisions of the Tax Cuts and Jobs Act; and
- tighter US financial conditions, which restrain growth.
- The outlook for China is also revised up over the near term due to a stronger starting point for exports.
- For the euro area, growth is revised down due to both weaker productivity and competitiveness challenges in the manufacturing sector.
Canadian outlook
The outlook for growth in Canada is revised down compared with the October Report.
- Growth in the third quarter of 2024 was 0.5 percentage points lower than projected, driven by weaker-than-expected contributions from inventory investment, exports and business investment. This weakness was partially offset by stronger-than-expected growth in consumption and government spending.
- Growth in GDP in 2025 and 2026 is projected to be lower by about 0.3 percentage points and 0.5 percentage points, respectively. This is primarily due to a downward revision to population growth resulting from new federal immigration policies and updated assumptions related to outflows of non-permanent residents.
- Consumption growth is revised up by 0.9 percentage points in 2025. Stronger growth in consumption per person reflects a slower decline in wage growth than previously forecast. Consumption growth is revised down by 0.5 percentage points in 2026 as a result of slower population growth.
- Growth in business investment is lower than projected by 2.8 percentage points on average, primarily reflecting weaker demand.
- Heightened uncertainty surrounding US trade policy reduces the level of investment by 0.5% by the end of 2026.
- The lower value of the Canadian dollar, which increases the cost of imported machinery and equipment, is also expected to reduce investment by about 1% by the end of 2026.
- Growth in exports is also revised down by 1.8 percentage points on average in 2025 and 2026. This reflects unexpected past weakness in exports relative to foreign demand growth that is expected to persist.
- Growth in imports is revised down by about 1 percentage point on average over the forecast with slower domestic demand.
- Excess capacity is revised down.
- Revisions to historical data indicate that the levels of economic activity beginning in 2021 were higher than in the October Report.1 The largest revisions were to business investment and consumer spending.
- The upward revisions to the level of potential output were also substantial but not as large as those to economic activity.2
- As a result, the economy has somewhat less excess supply than estimated in the October Report. The output gap is estimated to be about 0.3 percentage points narrower than it was before the upward revisions to historical data.
- Growth in potential output in 2025 and 2026 is about 0.3 percentage points and 0.6 percentage points, respectively, lower than previously estimated. Growth in trend labour input is expected to moderate due to slower population growth. This is partially offset by stronger growth in trend labour productivity, reflecting a higher ratio of capital to labour associated with the anticipated slower growth in labour input.
The temporary GST/HST holiday leads consumer price index inflation to be revised below and then above the October outlook. Looking through this effect, the projection for inflation is expected to be slightly higher.
- Lower-than-expected inflation in the fourth quarter of 2024 and the downward revision to the first quarter of 2025 are mostly due to the federal government’s temporary GST/HST holiday on some goods and services. Similarly, the outlook for inflation in the first quarter of 2026 has been revised up, reflecting the base year effect on inflation coming from the temporary tax cut.
- Setting aside the impact of the tax holiday, inflation is revised up slightly. This revision is due to less excess supply, stronger oil prices, and higher import prices resulting from the lower Canadian dollar. The upward pressures are partially offset by a weaker starting point for inflation and lower inflation in shelter prices.
Key inputs to the projection
The Bank of Canada’s projection is conditional on several key inputs and assumptions. The Bank regularly reviews these inputs and assumptions and adjusts the economic projection accordingly.
- The projection assumes that there are no new US tariffs. However, it does include a modest downward revision to business investment resulting from the increase in policy uncertainty.
- Population growth of people aged 15 and over is assumed to be 3.3% in 2024. Population growth is assumed to decline to 0.5% by 2026, 1.0 percentage points lower than forecast in the October Report. This revision reflects two factors:
- lower permanent resident targets in the federal government’s 2025–27 Immigration Levels Plan, which was announced on October 24, 2024
- downward revisions to the outlook for net flows of non-permanent residents, reflecting new information related to the duration of temporary permits
- Growth of potential output in Canada is expected to slow from about 2.5% in 2024 to around 1.5% on average over 2025 and 2026.
- The Bank estimates that the output gap is between -1.25% and -0.25% in the fourth quarter of 2024.
- The projection incorporates information from published federal and provincial budgets and recent fiscal updates that have been tabled at the time of writing.
- Over the projection horizon, the per-barrel prices for oil are assumed to be US$80 for Brent, US$75 for West Texas Intermediate and US$60 for Western Canadian Select. These prices are US$5 higher than in the October Report.
- By convention, the Bank does not forecast the exchange rate in the Monetary Policy Report. The Canadian dollar is assumed to remain at 70 cents US over the projection horizon, 3 cents lower than in the October Report.
- The nominal neutral interest rate in Canada is estimated to be in the range of 2.25% to 3.25%. The economic projection assumes that the neutral rate is at the midpoint of this range. The neutral rate is the rate to which the policy rate would converge in the long run, when output is sustainably at its potential and inflation is at target (i.e., after all cyclical shocks have dissipated). It is a medium- to long-term equilibrium concept. The Bank re-examines estimates of the neutral rate each year in April.
Endnotes
- 1. Since the release of the October Report, historical revisions to Statistics Canada’s National Economic Accounts data from the first quarter of 2021 to the second quarter of 2024 were released together with the data for the third quarter of 2024.[←]
- 2. For more detail on the potential output framework, see T. Devakos, C. Hajzler, S. Houle, C. Johnston, A. Poulin-Moore, R. Rautu and T. Taskin, “Potential output in Canada: 2024 assessment,” Bank of Canada Staff Analytical Note No. 2014-11 (April 2024).[←]