Deloitte Canada expects economic growth to accelerate in 2025, forecasting that the Bank of Canada will lower its policy interest rate to below 3% by mid-2025.
In its autumn economic outlook, released Thursday, Deloitte projects the central bank’s policy rate will fall to about 3.75% by the end of this year and reach a neutral rate near 2.75% by the middle of next year. These moves reflect an expectation that inflation pressures will continue easing, allowing monetary policy to shift from restrictive toward neutral.
The firm also expects the Canadian economy to expand modestly as softer labour market conditions persist. Many homeowners have not yet felt the full impact of higher borrowing costs because they will only encounter those higher rates when they refinance their mortgages, a dynamic that is likely to weigh on consumption for a period.
“We do think that we’re going to be in for a decent year next year,” said Dawn Desjardins, chief economist at Deloitte Canada. Her view is that Canada is likely to avoid a recession despite the cumulative effect of higher borrowing costs.
Desjardins noted that while higher interest rates have clearly left their mark on parts of the economy, headline indicators still show expansion overall. “It’s hard to argue that the economy is just skating through this period of higher interest rates. But having said that, the overall numbers themselves continue to show the economy is expanding,” she said. “Yes, the labour market has softened, but I don’t think we’re in any kind of crisis in the labour market at this time.”
Higher interest rates impacting economic growth, labour market
The Bank of Canada has already reduced its benchmark policy rate three times this year as inflation has eased, and it has signalled that more rate cuts are likely. Inflation in Canada reached the central bank’s 2% target in August, slipping from 2.5% in July and marking the lowest annual pace since early 2021.
Despite that progress on inflation, elevated borrowing costs have constrained growth and cooled the labour market. Deloitte’s forecast for a 2.75% neutral rate—the level at which monetary policy neither stimulates nor restrains the economy—remains higher than the interest-rate environment that prevailed in the years before the COVID-19 pandemic.
Desjardins said Deloitte’s forecast is broadly consistent with the central bank’s own guidance. She also pointed to a number of risks that could push inflation higher again, including climate-related impacts that can raise costs for households and businesses. “These are costly things that we’re going to have to deal with and will be embedded in prices. So that’s sort of how we get to this 2.75 (per cent),” she said.
Global conflicts, trade frictions and U.S. election add to uncertainty
Deloitte’s report highlights a challenging global backdrop for growth and inflation. Ongoing conflicts in Ukraine and the Middle East, rising trade frictions and political uncertainty—particularly around the upcoming U.S. election—have left businesses and consumers cautious.
Heightened global uncertainty is weighing on corporate investment decisions and household confidence. Desjardins said that lingering uncertainty makes firms reluctant to take on new projects or expand capacity, but she expects greater clarity to emerge in the new year as inflation and interest rates trend downward.
“We’ll see inflation coming down and interest rates coming down. So those are two powerful factors that will support an improvement in confidence both from the consumer side as well as the business side as we go through next year,” she said.
Overall, Deloitte remains optimistic about Canada’s economic prospects for 2025. The report argues that lower interest rates will ease the burden on highly indebted households enough to support a rebound in spending and a modest recovery in housing activity. “After two years of subpar growth, we look for the economy to hit its stride in 2025,” the firm concluded.
Housing affordability will remain a challenge due to lack of supply
Even as inflation moderates, housing costs—especially rents—remain elevated and continue to put pressure on household budgets. Deloitte expects that interest-rate cuts will help stimulate construction and that home-building activity should pick up through 2025. Still, the consulting firm cautions that the recovery in the housing market is likely to be modest because affordability remains weak for many buyers.
Desjardins emphasized that the core affordability problem is a structural shortage of housing supply. “We know that Canada has a pretty significant supply deficit on the housing side,” she said. “The housing cannot be created overnight.” Without a significant and sustained increase in new housing construction, affordability pressures are unlikely to ease materially.
At the same time, she does not expect house prices to surge markedly. Slower demand from some segments—such as newcomers over time—could offer marginal relief in certain markets. The combination of improving mortgage terms and gradual construction growth suggests a recovery that, while helpful, may be uneven and constrained by long-standing supply limits.
More about the economy:
- Canada’s inflation rate falls to 2%, paving way for another interest rate cut
- High borrowing costs, record completions lead to condo oversupply
- Is this a good time to buy a home in Canada?
- U.S. Fed Chair: the time has come to begin reducing interest rates