The Bank of Canada is expected to further reduce interest rates next year.

The Canadian dollar has continued to strengthen despite a rapid appreciation of the U.S. dollar, supported by the Federal Reserve's signals of smaller rate cuts in 2025 and stronger-than-expected U.S. economic growth. This has boosted confidence in the U.S. economy's ability to sustain growth even under high interest rates. Meanwhile, the Canadian dollar has been bolstered by surging crude oil prices. However, there is speculation that the Bank of Canada may proceed with additional rate cuts to support weak economic growth, widening the interest rate differential with the United States.

Canada's inflation rate stood at 1.9% year-over-year in November, down from 2% in the previous month and below the market expectation of 2%. This aligns with the Bank of Canada's projections that inflation is likely to remain near the 2% benchmark in the near term. However, core inflation remained steady at 2.7%, exceeding the forecast of 2.5%. Slightly rising transportation costs may affect business operating costs and the overall economy, potentially keeping inflation at approximately 2%.

Foreign investors increased their holdings of Canadian assets to a net $21.55 billion in October, marking the eighth consecutive month of inflows, although falling short of market expectations of $24.5 billion. This increase was driven by foreign purchases of Canadian debt securities amounting to $11.8 billion, including $8.1 billion in government bonds. Meanwhile, equity investments also continued to rise, totaling $9.8 billion, mostly in trade and transportation-related stocks. Conversely, Canadian investors reduced their holdings of foreign securities by $2.6 billion, marking the first selloff since January, primarily through the sale of $15.6 billion in foreign stocks, most of which were U.S. equities.

Canada's government budget deficit narrowed to CAD 1.5 billion in October 2024 from CAD 7 billion in the same month the previous year. For the first seven months of the 2024/25 fiscal year (April–October), the deficit stood at CAD 14.5 billion, an improvement from CAD 15.1 billion during the same period the previous year. Program expenses increased by 9.8%, driven by higher transfers to individuals and provinces, while public debt charges surged by 19.4%, reflecting higher real rates on tradable bonds and treasury bills. At the same time, government revenues rose by 10.7%, mainly due to higher corporate and personal income tax receipts.

The yield on Canada's 10-year government bonds fell to 3.28% from 3.345%, in line with declining U.S. Treasury yields following weaker-than-expected U.S. inflation data. This has heightened expectations that the Bank of Canada may implement further rate cuts next year. However, domestic demand issues and significant labor market slowdowns have prompted the Bank of Canada to lower its GDP growth forecast to 1.7% for 2025 (from 1.9%) and 2.1% for 2026 (from 2.2%). This reflects slowing momentum despite a recent 50 basis point rate cut to 3.25%. Meanwhile, the resignation of Finance Minister Chrystia Freeland, due to policy conflicts with Prime Minister Trudeau, has added uncertainty to Canada's fiscal policies.