The Bank of Canada has lowered its interest rate by 50 basis points to 3.25 per cent, but hinted it may pump the brakes on further deep cuts over concerns about inflation.
The Bank of Canada reduced its interest rate by 50 basis points on Wednesday, bringing it down to 3.25%. The central bank also indicated that future rate cuts would likely proceed at a slower pace, as it aims to maintain inflation near its 2% target.
The move, which marks the fifth consecutive rate cut since June, was widely anticipated by economists. Their predictions were influenced by weaker-than-expected third-quarter GDP growth and a rise in unemployment, both of which signaled a need for further economic support.
In a press conference, Bank of Canada Governor Tiff Macklem explained that the central bank's monetary policy no longer needs to be as restrictive, given that inflation has remained around 2% since the summer. However, he acknowledged that changes in federal policies, such as reduced immigration targets, will have a significant impact on economic growth and inflation in the coming months.
"Lower immigration rates mean fewer new consumers and workers, which will slow GDP growth," Macklem stated.
Other factors behind the decision included projections for continued weak growth in the fourth quarter. "When you consider the weaker-than-expected third quarter and our outlook for the fourth quarter, it made sense to cut rates by 50 basis points," Macklem said.
Following the central bank's decision, major banks including TD, BMO, CIBC, and RBC lowered their prime rates from 5.95% to 5.45%.
Economic Outlook and Challenges
Looking ahead, the Bank of Canada plans to provide further updates on key policy measures, such as the GST holiday and changes to mortgage rules, in its January economic outlook. Macklem also noted the importance of the federal government’s fall economic statement, expected on Monday, in shaping the central bank's next steps.
While the Canadian economy remains under pressure, with unemployment rising in cities like Toronto and global factors posing additional risks, some economists believe the central bank is moving toward a “neutral” interest rate—estimated to be between 2.5% and 3%. Frances Donald, chief economist at RBC, predicts rates could drop to 2% by the end of 2025.
"This economy is still grappling with the effects of high interest rates," Donald said. "Although rates have come down, more reductions are likely."
The Canadian dollar strengthened after the announcement, trading at 1.4164 Cdn to the U.S. dollar by mid-afternoon. Analysts suggest this rally reflects market expectations of a slower pace of rate cuts in the future.
Trade Uncertainty Looms
The potential for U.S. tariffs on Canadian goods also featured prominently in Wednesday's discussions. Governor Macklem described the proposed 25% tariffs as a significant risk to Canada’s economy, potentially disrupting exports and further dampening business investment. However, he noted that uncertainty around whether the tariffs will be implemented makes it difficult to adjust policy based on speculation.
The Bank of Canada plans to take a measured approach to future rate adjustments. While additional cuts are expected, Macklem emphasized that the effects of the five reductions since June are still working their way through the economy.
"If the economy evolves as we anticipate, future cuts will likely be more gradual," he concluded.
