On January 29th, its first scheduled announcement of 2025, the Bank of Canada announced that it had lowered the target for the overnight lending rate by 25 basis points to 3.0%. This marks the sixth consecutive cut to rates since June 2024.
In December, Canada’s Consumer Price Index (CPI) rose 1.8% on a year-over-year basis, down from a 1.9% increase in November, once again hitting under the Bank’s 2% inflation target. In its announcement, the central bank stated that lower interest rates are helping to increase household spending, and as a result, the economy is expected to strengthen gradually and inflation to stay close to target. However, trade conflict from south of the border threatens to cause economic turmoil.
“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada. At the same time, the higher cost of imported goods will put direct upward pressure on inflation. The magnitude and timing of the impacts on output and inflation will depend importantly on how businesses and households in the United States and Canada adjust to higher import prices,” said Tiff Macklem, Governor of the Bank of Canada, in a press conference with reporters following the announcement. “Unfortunately, tariffs mean economies simply work less efficiently — we produce and earn less than without tariffs. Monetary policy cannot offset this. What we can do is help the economy adjust. With inflation back around the 2% target, we are better positioned to be a source of economic stability.”
Tariff conflict throws rate trajectory into question
Though lower borrowing costs will be welcome news for homebuyers in the immediate future, the course of interest rates and the broader economy remains uncertain in the face of looming tariff threats by the United States. With the spring housing market expected to get underway in a matter of weeks, trade conflict will be on the minds of many Canadian consumers.
“The Bank of Canada has dropped interest rates yet again, a decision that will further increase borrowing capacity for homebuyers and benefit mortgage holders whose loans are coming up for renewal. This latest decrease arrives just before the spring housing market – when demand typically picks up – which should spur buying and selling activity in the weeks ahead,” said Phil Soper, president and CEO of Royal LePage. “However, the looming promise of hefty tariffs by the United States government is a source of uncertainty for the central bank and consumers alike. Not only is there debate on just how severe the tariffs might be, but how Canada will respond.
“We believe the Bank of Canada’s focus will be a decided shift from an inflation battle to avoiding an economic downturn. A recession resulting from a tariff tit-for-tat could prompt additional cuts in the short-term to stimulate the economy. Though Canada’s housing market would be insulated for the most part from trade turmoil, economic challenges could eventually cause activity to slow.”
Two supersized rate cuts in the fall of 2024 helped to spur buying and selling activity in Canada’s housing market during the final months of the year. According to the most recent Royal LePage House Price Survey, the aggregate1 price of a home in Canada increased 3.8% year over year to $819,600 in the fourth quarter of 2024. On a quarter-over-quarter basis, the national aggregate home price remained essentially flat, rising a modest 0.5%. While activity began to flourish again in the final months of 2024, following sluggish demand in most major markets over the summer, home price appreciation remained in check last quarter. Royal LePage is predicting home prices to appreciate across the country over the coming year, as lower borrowing costs bring buyers off the sidelines.
The Bank of Canada will make its next interest rate announcement on Wednesday, March 12th.
Read the full January 29th report here.
1Aggregate prices are calculated using a weighted average of the median values of all housing types collected. Data is provided by RPS Real Property Solutions and includes both resale and new build.
