When it comes to interest rates in 2025, Canada and the United States are moving in the same general direction—toward cuts—but the pace and reasoning behind each central bank’s decision differ. Understanding why the paths diverge helps us see what’s ahead for households, businesses, and investors.

Canada: Easing to Support Growth

The Bank of Canada has signaled it is ready to ease further. With slower GDP growth, softer labour numbers, and inflation momentum calming compared to the last two years, economists widely expect at least one more 25 bps cut this year. Some forecasts even suggest a total of two cuts, which would bring the policy rate down toward 2.25% by year-end.

For Canadians, this means variable-rate mortgages, lines of credit, and some loan payments could start to feel lighter. At the same time, the Bank must balance relief for households with caution against reigniting inflation—especially in sensitive areas like housing.

United States: Careful but Starting

South of the border, the Federal Reserve is also moving toward rate cuts. Inflation has cooled compared to 2022, with the Fed’s preferred PCE index running around 2.6%, close to its 2% target. Still, the Fed is cautious. The U.S. economy remains stronger than Canada’s, with a tighter labour market and more resilient consumer spending.

Markets expect the Fed to trim rates gradually—perhaps 50 bps in total this year—but without moving too aggressively. For them, the priority is making sure inflation doesn’t flare back up.

Why the Paths Differ

The main difference lies in the economic backdrop. Canada’s growth has been hit harder by global trade challenges and weaker domestic demand, so the Bank of Canada has more reason to ease sooner. The U.S., on the other hand, is still balancing decent growth with inflation that isn’t fully tamed.

Put simply: Canada is cutting because it needs to support growth. The U.S. is cutting because it can, but only carefully.

Why U.S. Decisions Matter for Canadians

Even though our central bank makes independent decisions, U.S. policy has a powerful spillover effect:

• Currency: Fed cuts can weaken the U.S. dollar, which influences the Canadian dollar. A weaker CAD makes imports more expensive and can nudge Canadian inflation higher.

• Markets: U.S. bond yields drive global markets. When the Fed shifts, it ripples through mortgage rates and investment returns in Canada.

• Confidence: The U.S. economy sets the tone for global growth. If the Fed cuts too quickly or too slowly, it can sway Canadian business and consumer confidence.

In short, while Canada charts its own course, the U.S. decisions still shape the environment we live and invest in.

What It Means for Cost of Living

Potential rate cuts are welcome news for households carrying variable debt or approaching mortgage renewals. Borrowing costs should gradually ease, helping cash flow. That said, cuts don’t directly lower grocery bills or rents. Those pressures remain tied to supply, wages, and demand. If cuts stimulate housing demand, they may even keep housing affordability stretched in some regions.

Harmony Financial’s View

At Harmony Financial, we’re encouraged by the clearer direction from both central banks. It opens a window to refinance debt, restructure portfolios, and position investments ahead of lower yields. Most importantly, it’s a reminder that having a plan in place is what allows you to turn big economic changes into real opportunities.