The Bank of Canada lowered its interest rate by 50-basis points to 3.25 per cent on Wednesday, but signalled a slower pace of rate cuts moving forward as it focuses on keeping inflation close to target.
Economists were largely expecting another weighty cut following a quarterly GDP report that saw growth come in below the central bank’s 1.5 per cent projection and a jobs report that showed an uptick in the unemployment rate.
The decision marked the fifth consecutive reduction since June. In October, the central bank cut rates by a half-point for the first time since the pandemic.
Bank of Canada governor Tiff Macklem said during a news conference that the bank’s governing council felt its monetary policy no longer needed to be as restrictive, with inflation hovering around its two per cent target since the summer.
He added that several policy measures, including the federal government’s decision to lower immigration targets, will impact the outlook on economic growth and inflation going forward.
Lower immigration rates “will pull GDP growth down, because there’s going to be less new consumers, less new workers in the economy,” Macklem explained.
Other factors influenced the council’s decision to cut by 50 basis points, including weaker-than-expected third-quarter growth, and the bank’s projection that fourth-quarter growth will be a similar story.
“You put that together, both of those factors really signalled that a 50-basis point cut made sense,” he said.
Bank of Canada governor Tiff Macklem explained Wednesday why the organization cut a key rate for the fifth consecutive time and suggested the bank would take a ‘more gradual’ approach to monetary policy going forward.
The Bank of Canada will have more to say about the impact of other policy measures — including the GST holiday and mortgage rule changes — when it releases its economic outlook in January, he added.
The central bank will also be watching for the federal government’s fall economic statement, which is expected on Monday.
“The Canadian economy is still struggling. The unemployment rate is rising, especially in places like Toronto, and there are global threats to the Canadian economy,” RBC chief economist Frances Donald told CBC News, noting those threats include protectionist policies from the U.S. and a global slowdown in economic growth.
She added that most economists are expecting the central bank to get close to a “neutral” rate, which is a rate that’s neither restrictive nor easing — somewhere around the 2.5 to three per cent mark.
Right now, RBC expects the Bank of Canada to cut its interest rate down to two per cent by the end of 2025. Even if the bank’s heftier 50-basis-point cuts are in the rearview mirror, Donald expects more cuts to come.
“This is an economy that is still struggling under the weight of interest rates, which have come down quite a bit but have more to go,” Donald said.
Bank highlights risk of Trump tariff threat
Several reporters asked Macklem about U.S. president-elect Donald Trump’s threats of a 25 per cent tariff on all Canadian goods. The central bank highlighted the proposed tariffs as a risk to the Canadian economy in its interest rate announcement.
“The threat of new tariffs on Canadian exports, particularly at the level that’s been suggested, that is a major new source of uncertainty,” said Macklem.
Bank of Canada governor Tiff Macklem says the threat of tariffs are a new source of uncertainty but went on to cite the many unknowns around president-elect Donald Trump’s proposal, saying ‘we can’t run policy on something that might happen.’
He acknowledged that if the proposed tariffs were applied, they would be “very disruptive” to the Canadian economy and further impact the downward trend in business investment.
But he said that with so much still unknown about the tariffs, including whether they will be implemented, whether there will be exceptions, or if the federal government will retaliate, “we can’t run policy on something that might happen.”
As for the central bank’s plan for cuts moving forward, Macklem noted that the five rate cuts made since June are still working their way through the economy.
“Going forward I expect the governing council will be considering further reductions to the policy rate,” he said. But if the economy continues to evolve as expected, the Bank of Canada will take a more gradual approach to cuts.
“The reality is we’re going to take those decisions one meeting at a time.”