Bank of Canada makes another hefty rate cut with slower pace of cuts going forward
Macklem says bank has highlighted Trump tariff threats as a potential risk
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.
TD Bank, BMO, CIBC, and RBC announced that they had lowered their prime rates by 50 basis points, to 5.45 per cent from 5.95 per cent, on Wednesday afternoon.
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," she said.
The Canadian dollar rallied on news of the central bank's cut Wednesday, likely due to the messaging around a slower pace of rate cuts going forward. The loonie was trading at 1.4164 Cdn against the U.S. dollar by mid-afternoon.
"This is a market that's already expecting a significant amount of easing," said Donald. "Governor Macklem's comments that he's going to go from maybe these larger cuts to a more gradual pace probably eliminated one of the risks that they would continue to cut by 50-basis points."
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.
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."
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With files from The Canadian Press
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