The Bank of Canada has announced it has:
reduced its target for the overnight rate to 3¼%, with the Bank Rate at 3¾% and the deposit rate at 3¼%. The Bank is continuing its policy of balance sheet normalization.
The global economy is evolving largely as expected in the Bank’s October Monetary Policy Report (MPR). In the United States, the economy continues to show broad-based strength, with robust consumption and a solid labour market. US inflation has been holding steady, with some price pressures persisting. In the euro area, recent indicators point to weaker growth. In China, recent policy actions combined with strong exports are supporting growth, but household spending remains subdued. Global financial conditions have eased and the Canadian dollar has depreciated in the face of broad-based strength in the US dollar.
In Canada, the economy grew by 1% in the third quarter, somewhat below the Bank’s October projection, and the fourth quarter also looks weaker than projected. Third-quarter GDP growth was pulled down by business investment, inventories and exports. In contrast, consumer spending and housing activity both picked up, suggesting lower interest rates are beginning to boost household spending. Historical revisions to the National Accounts have increased the level of GDP over the past three years, largely reflecting higher investment and consumption. The unemployment rate rose to 6.8% in November as employment continued to grow more slowly than the labour force. Wage growth showed some signs of easing, but remains elevated relative to productivity.
A number of policy measures have been announced that will affect the outlook for near-term growth and inflation in Canada. Reductions in targeted immigration levels suggest GDP growth next year will be below the Bank’s October forecast. The effects on inflation will likely be more muted, given that lower immigration dampens both demand and supply. Other federal and provincial policies—including a temporary suspension of the GST on some consumer products, one-time payments to individuals, and changes to mortgage rules—will affect the dynamics of demand and inflation. The Bank will look through effects that are temporary and focus on underlying trends to guide its policy decisions.
In addition, the possibility the incoming US administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook.
CPI inflation has been about 2% since the summer, and is expected to average close to the 2% target over the next couple of years. Since October, the upward pressure on inflation from shelter and the downward pressure from goods prices have both moderated as expected. Looking ahead, the GST holiday will temporarily lower inflation but that will be unwound once the GST break ends. Measures of core inflation will help us assess the trend in CPI inflation.
With inflation around 2%, the economy in excess supply, and recent indicators tilted towards softer growth than projected, Governing Council decided to reduce the policy rate by a further 50 basis points to support growth and keep inflation close to the middle of the 1-3% target range. Governing Council has reduced the policy rate substantially since June. Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time. Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook. The Bank is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target.
Mark Rendell in the Globe comments:
Mr. Macklem justified the oversized move by pointing to tepid economic growth and a weakening labour market in recent months. Canada’s gross domestic product growth undershot the bank’s forecast in the third quarter and the unemployment rate jumped to 6.8 per cent in November from 6.5 per cent the month before.
“Monetary policy no longer needs to be in restrictive territory. We want to see growth pick up to absorb the unused capacity in the economy to keep inflation close to 2 per cent,” Mr. Macklem said.
He highlighted a number of risks on the horizon. Chief among these is a slowdown in population growth following Ottawa’s new immigration targets, “which suggest GDP growth next year will be lower than we forecast in October,” Mr. Macklem said.
He also pointed to the potential of U.S. tariffs on Canadian goods, which he called “a major new uncertainty.” President-elect Donald Trump has threatened to impose a 25-per-cent tariff on all Canadian imports unless Ottawa does more to address border security concerns, and he campaigned on a across-the-board tariff of 10 per cent to 20 per cent on all imports.
“The economic outlook is clouded by the possibility of new tariffs on Canadian exports to the United States. No one knows how this will play out in the months ahead – whether tariffs will be imposed, whether exemptions get agreed, or whether retaliatory measures will be put in place,” Mr. Macklem said.
…while Darcy Keith reports:
Implied interest rate probabilities in overnight swaps markets suggest a 67 per cent chance of a 25 basis point cut at the next policy meeting on Jan. 29, and 33 per cent odds that there will be no change at all to the bank’s overnight rate, according to the latest LSEG data after today’s BoC decision.
Post-announcement
The indicated December, 2025, rate of 2.65% may be compared with the 2024-12-6 forecast of 2.61%.
Prime followed:
Well, Rob Carrick and Ryan Siever will be mad – nothing on the way up and precious few hopes for the way down:
There’s a case to be made for banks giving borrowers a break when what is expected to be the biggest interest rate hike in 22 years is announced on Wednesday.
A brief flashback to 2015 is required to get the sense of this story. The economy back then was in the opposite shape of what it is now – weak enough to prompt the Bank of Canada to cut its trendsetting overnight rate by 0.25 of a percentage point in January and again in July.
The big banks hijacked part of that rate cut. While the overnight rate fell by a total 0.5 of a point, the banks cut their prime rate by cumulative 0.3 of a point. They held back the rest of the rate cut to build their revenues and profit.
There was a delay in reducing the prime when the Canada Overnight rate dropped 25bp to 0.75% in January 2015 and again when Canada Overnight dropped a further 25bp to 0.50% in July of that year.
