The past few years have been challenging ones for many people from a financial perspective, given the steep interest rates and unusually high inflation. Do you have the impression that the situation has improved recently? Here’s where we stand at the beginning of 2025. 

Interest rates have started to drop 

At its meeting on June 7, 2024, the Bank of Canada began to ease its monetary policy, reducing its key interest rate for the first time since March 2022. After being held at a peak of 5.00% for the first few months of 2024, the key rate gradually dropped to 3.25% by year-end. As you know, the key interest rate affects most rates on consumer loans and mortgages, as well as fixed income securities such as guaranteed investment certificates.  
 
It’s important to note that even though the key rate is now declining, it’s still higher than it has been for the past 15 years. In particular, this means that if you took out a mortgage before mid-2022 and the renewal is coming up this year, you might find yourself facing more costly terms.  

Inflation seems to be under control 

If interest rates are dropping, it’s because the Bank of Canada feels it has succeeded in bringing inflation (i.e., the annual increase in the cost of living) back within its target range of 1% to 3%. Last November, Canada’s inflation rate was 1.9%, after reaching a peak of 8.1% in June 2022. 

There are two points to be aware of here. First, a drop in inflation doesn’t mean a drop in consumer prices; that would be deflation. Food and housing, in particular, now cost an average of 16% more than they did in January 2022. Second, economists are keeping an eye on the geopolitical situation, as well as decisions made by the incoming U.S. administration, which could have an impact on the economic situation, inflation and interest rates on both sides of the border. 

Canada’s economy is snoozing… 

While the Bank of Canada’s monetary policy resulted in lower inflation, it has also had a dampening effect on the Canadian economy. The long recession feared by many analysts has been averted, but economic growth remains weak as we now move into a new year. 

…while the U.S. economy is buzzing 

By comparison, the U.S. economy has been the envy of many countries since 2021. Major public investment programs introduced by the Biden administration at the end of the pandemic are largely responsible for this performance – and for the resulting high inflation rate. Economists are now waiting to see how the course change announced by the Trump administration will be reflected in the economic reality. 

The stock markets generated solid returns 

As for North American stock markets, they provided high returns again this year. After showing some volatility over the summer and in the weeks leading up to the U.S. presidential election on November 5 (which is nothing unusual, as this article explains), both the Canadian and U.S. stock markets ended the year on an upswing. Canada’s S&P/TSX index closed up by more than 18% over 12 months, while the U.S. S&P 500 index was up by about 23%. 

The bond markets also did well 

Anyone investing in bonds, bond funds or balanced funds (which include bonds and equities), also profited from rising markets in 2024 – an anticipated effect of the lower interest rates. For example, the S&P Canada All-Bond index ended the year up by more than 4%.

The loonie lost a few feathers 

One last indicator that will interest people travelling to the United States as well as those with savings invested there: in 2024, the exchange rate for the Canadian dollar against the U.S. dollar went from about $0.75 to less than $0.70. As described in this article, a lower Canadian dollar might be bad news for people travelling to our southern neighbour, but it’s good news for anyone investing Canadian dollars in U.S. mutual funds. In fact, when the loonie loses value with respect to the currency in which the securities are traded, that will increase the return; if it gains value, that will reduce the return. So if you own any U.S. mutual funds, it’s possible that the Canadian dollar’s decline has helped to boost their performance in 2024. 

New capital gains inclusion rate remains in effect for the time being 

Finally, a piece of early-year news of great importance from a tax point of view: with the prorogation of Parliament announced by Prime Minister Trudeau on January 6, the increase in the capital gains inclusion rate, which had come into effect on June 25, 2024, could never be formalized into law. In principle, this would mean that the measure has been cancelled. However, on January 7, the Department of Finance stated that the Canada Revenue Agency would continue to administer the new policy until further notice. As a matter of fact, it is not uncommon for the Agency to apply announced tax measures even if the legislative process for their adoption has not been completed. The Department of Finance specifies that the Agency will cease to apply the policy if the government decides not to implement it when Parliament resumes (scheduled for the end of March). At the time of writing, and barring any further changes, it therefore appears that investors who realized capital gains in 2024 will have to take the new rates into account on their next tax return. For more details, see this article. 

What does the future hold? 

On the basis of this review, what can we expect in 2025? Economists remind us that the global geopolitical situation remains uncertain, given the conflicts in Ukraine and the Middle East, strained trade relationships between the United States and other countries, not to mention impending decisions from the new U.S. administration. How will all these issues be reflected in consumer spending, business investment, economic growth, inflation and stock market performance?  

We won’t really know until January 2026, but in the meantime, if you’re concerned about this question – and about its impact on your personal finances in particular – your advisor will be able to clarify things for you.