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The impact of economic issues on interest rates in Canada in 2025

Interest rates play a central role in the Canadian economy, influencing everything from business investment to household finances. In 2025, as Canada faces multiple economic challenges, each of these challenges contributes directly or indirectly to shaping monetary policy and interest rate decisions. Let's take a look at how each major issue could influence this crucial element.


1. Uneven economic growth between provinces

Regional economic disparities influence the Bank of Canada's (BoC) decisions. Robust growth in Ontario and Quebec could encourage a rate hike to avoid economic overheating in these provinces. Conversely, resource-dependent provinces facing economic difficulties could prompt the BoC to adopt a more accommodating policy to support domestic demand.


2. Inflation and interest rates: an essential relationship

Inflation remains the main driver of interest rate decisions. In 2025, the Bank of Canada will seek to maintain its inflation target of 2%. If supply shocks, such as a rise in energy or food prices, push up inflation, this could lead to higher rates. On the other hand, a stabilization of prices could allow for a more flexible policy.


3. Energy transition and climate

The costs associated with the energy transition, such as the carbon tax and massive investment in renewable energies, could create inflationary pressure. The Bank of Canada will then have to choose between containing this inflation with higher rates, or supporting the economy by keeping rates low to stimulate investment in the transition.


4. An aging population

With an aging population, economic growth is likely to slow. This may lead to lower interest rates to stimulate the economy. However, increased pressure on the healthcare system and pensions could force governments to borrow more, thereby increasing public debt and potentially pushing up interest rates to contain the effects on the bond market.


5. Skill shortages

A shortage of talent can stimulate wage inflation as employers compete for workers. Persistent wage inflation could lead to higher interest rates to contain price pressures, although this could dampen overall economic growth.


6. Digitization and automation

Massive investment in technology and automation could boost productivity in the long term, reducing inflationary pressures. However, in the short term, the costs of implementing these technologies could contribute to higher prices, prompting the BoC to adjust interest rates to regulate the economy.


7. Dependence on international trade

Trade tensions or currency fluctuations can directly influence imported inflation. A depreciation of the Canadian dollar could increase the cost of imports, reinforcing inflationary pressures and prompting the BoC to raise rates. Conversely, an improvement in trade relations could stabilize inflation and allow for a more accommodating monetary policy.


8. Access to affordable housing

High real estate costs continue to play a critical role in the Canadian economy. Lower interest rates could make mortgages more affordable, stimulating demand and exacerbating price rises. On the other hand, higher rates could curb the overheating of the real estate market, but at a high cost to potential buyers.


9. Support for innovation

Low interest rates can encourage innovation by making financing for start-ups and R&D projects more accessible. However, if the Bank of Canada raises rates, this could slow investment in high-growth sectors, holding back technological development.


10. Growing economic inequality

Interest rates have a disproportionate impact on different segments of the population. High rates favor savers and investors, but penalize borrowers and indebted households. In 2025, the Bank of Canada will have to find a balance between avoiding aggravating these inequalities and controlling inflation.


Conclusion

In 2025, interest rates will remain an essential lever for regulating the Canadian economy. However, their evolution will be largely influenced by a complex combination of economic issues, ranging from inflation to the energy transition. Prudent and appropriate management by the Bank of Canada will be essential to meet these challenges, while supporting sustainable economic growth.

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