Monetary Policy & Interest Rates

Monetary policy refers to the actions undertaken by a country's central bank or monetary authority to control the money supply, interest rates, and overall economic stability. Its main objectives are to manage inflation, stabilize the currency, promote employment, and achieve sustainable economic growth.

There are two primary types of monetary policy:

1. Expansionary Monetary Policy: This is used to stimulate the economy by increasing the money supply and lowering interest rates. It is typically implemented during periods of economic slowdown or recession to encourage borrowing, investment, and consumption.

2. Contractionary Monetary Policy: This aims to reduce inflation by decreasing the money supply and raising interest rates. It is often used when an economy is overheating, and inflation is rising too quickly.

The central bank, like the Federal Reserve in the U.S. or the Bank of Canada, uses tools like open market operations (buying or selling government bonds), adjusting the discount rate (interest rates for banks), and changing reserve requirements (how much banks must hold in reserves) to implement monetary policy.

Heading into 2025, Canada's interest rates are expected to see gradual reductions, although these may be limited and contingent on economic conditions such as inflation and labor market performance. With inflation stabilizing, some financial experts predict that the Bank of Canada may start reducing rates by mid-2025, with an aim to ease rates to about 2.5% by late 2025. This forecasted shift is likely to provide some relief to mortgage holders and the housing market, which has been impacted by high borrowing costs throughout 2023 and 2024?

These rate adjustments would primarily depend on inflation's continued moderation and the strength of Canada's economy. Economic indicators like GDP growth, unemployment rates, and consumer demand will also play critical roles in determining the timing and extent of these rate cuts. While some banks, like TD, have offered optimistic projections, other economists caution that rates might not drop substantially if inflation resurges.