A new report foresees lower rates to boost economic growth but warns of remaining risks
As 2025 unfolds, Canada’s economic landscape is poised to benefit from significant interest rate cuts during the previous year. However, broader challenges such as geopolitical tensions, policy shifts, and structural economic hurdles cast uncertainty over the road ahead, according to Royal Bank of Canada’s (RBC’s) recent economic outlook report.
After the Bank of Canada successfully tamed broad price growth in 2024, annual inflation is projected to remain below 2% this year. This milestone provides breathing room for Canadian households, with average hourly wages outpacing inflation since the pandemic, increasing by 23% compared to a 19% rise in prices. However, analysts noted uneven income gains and escalating costs for essentials such as housing and food continue to strain lower-income households.
The Bank of Canada is expected to ease monetary policy further, reducing its overnight rate to 2% by mid-year. These cuts aim to stimulate economic activity by lowering financing costs, particularly for businesses and homeowners. Still, the report cautions that even with declining policy rates, mortgage rates tied to three-to-five-year bond yields may remain stubbornly steady due to external factors such as higher US interest rates.
Housing market and debt dynamics
The anticipated interest rate reductions are likely to stabilize the average household debt burden and mitigate the impact of the mortgage renewal shock. However, the housing market, a critical driver of the Canadian economy, remains sensitive to inflationary pressures. While the report does not predict a significant resurgence in housing activity, any acceleration could amplify shelter inflation.
Despite stabilization in household debt, consumption growth is projected to slow to 1.6% in 2025. High consumer price levels, particularly for younger workers and recent immigrants, further highlight the bifurcated financial experience across demographic groups.
Business investment and global risks
For businesses, lower borrowing costs are expected to spur investment growth after years of restraint. However, uncertainties such as US tariff threats and potential shifts in domestic policies due to the upcoming federal election present risks to long-term economic stability. These factors may drive businesses to focus on building operational buffers and investing in resilient technologies like artificial intelligence and green supply chains.
The RBC report underscored that while interest rate cuts will bolster economic activity, the benefits will not be evenly distributed. The Canadian economy faces a delicate balancing act as it navigates external pressures, shifting demographics, and structural challenges in productivity and housing supply.
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