Bank of Canada cuts interest rate by half point to 3.25 per cent, eyes slower pace

The Bank of Canada made its second straight outsize cut in interest rates and signalled policymakers are ready to slow down monetary easing.

 

Officials led by Governor Tiff Macklem lowered the benchmark overnight rate by 50 basis points to 3.25% on Wednesday, bringing borrowing costs to the top end of the range of their estimate for the neutral rate — a level that’s neither restrictive nor stimulative for the economy.

 

Yet they also suggested the jumbo cut — which was anticipated by markets and most economists — will likely be followed by a return to smaller cuts in 2025. Officials dropped language that had been in previous statements that said they expect to reduce borrowing costs further if their forecasts materialize.

While Canadian policymakers expect inflation to be close to the 2% target over the next couple of years, the government’s reduced immigration targets, two-month sales tax holiday, and potential tariffs may change the outlook for growth and inflation in the months ahead, Macklem said.

 

Prime Minister Justin Trudeau’s government is suspending sales taxes on certain products starting in mid-December, which is expected to temporarily lower inflation to around 1.5% in January, but that effect would be unwound after the program ends in mid-February, the governor said. And with the level of immigration to decline, slower population growth will also reduce economic growth, he said.

 

“Unless we get a material dose of fiscal stimulus for 2025, the sluggish growth path and considerable economic slack calls out for a monetary policy setting that at least dips into stimulative territory,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors.

 

“We’re therefore sticking to our target for a series of quarter point cuts to take the overnight rate to 2.25% by mid-2025.”

 

The loonie’s risk profile remains highly asymmetric, said Karl Schamotta, chief market strategist at Corpay. “Bad news is, to a significant degree, already priced into the exchange rate, and traders have been bracing for a widening in the gap between US policy rates and their Canadian equivalents for months,” he said in a report to investors.

 

“An improvement in domestic fundamentals or a slowdown in the American economy could deliver modest exchange rate gains in the new year,” Schamotta added.

 

Stephen Brown with Capital Economics pointed out the “hawkish change” of replacing the line from recent statements that policymakers “expect to reduce the policy rate further” with the more ambiguous pledge to evaluate “the need for further reductions in the policy rate” at each decision.

“That is largely because the 50 basis-point cut means we are now at the top end of the Bank’s 2.25% to 3.25% neutral range estimate. Additional interest rate cuts still seem likely, however,” Brown said in a report to investors.

 

The bank sees job market as softening, with the number of people looking for work still rising faster than the number of jobs. Rate cuts have spurred consumer spending and housing activity, but growth in the third quarter was pulled down by business investment, inventories and exports.

 

“Monetary policy no longer needs to be clearly in restrictive territory,” he said. “We want growth to pick up to absorb the unused capacity in the economy to keep inflation close to 2%.”

 

 

 

 

This article was first reported by BNN Bloomberg