Bank of Canada Cuts Key Interest Rate by 50 Basis Points to 3.25% to Support Growth

In a move aimed at supporting economic growth, the Bank of Canada announced a reduction of the policy interest rate by 50 basis points, lowering the overnight rate target to 3¼%. This decision also adjusted the Bank Rate to 3¾% and the deposit rate to 3¼%. The Bank continues its balance sheet normalization policy.

According to the Bank's Monetary Policy Report for October, the global economy is largely progressing as expected. The United States is maintaining a strong economy with robust consumption and a solid labor market, while inflation rates remain stable. The euro area is showing signs of weaker growth, while China is experiencing some economic support from policy actions and strong exports, despite stagnant household spending. Global financial conditions have eased, and the Canadian dollar has weakened against a generally strong US dollar.

Canada's economic growth was reported at 1% in the third quarter, slightly below the Bank's previous forecasts, and the fourth quarter is also expected to fall short of expectations. Factors such as business investment, inventories, and exports contributed to this decline, while consumer spending and housing activity showed increases, indicating that lower interest rates are starting to affect household spending. Revisions to National Accounts reflect a rise in GDP levels over the past three years, primarily attributed to higher investment and consumption. The unemployment rate in Canada rose to 6.8% in November, with job growth lagging behind the labor force. Wage growth has shown signs of slowing, but remains high relative to productivity.

Policy measures expected to impact near-term growth and inflation in Canada include planned reductions in the targeted immigration levels, anticipated to bring GDP growth below the Bank's October forecast for the next year. The impact on inflation is expected to be less significant, as lower immigration tends to reduce both demand and supply. Additional federal and provincial policies, such as a temporary suspension of GST on certain consumer products, one-time payments to individuals, and changes to mortgage rules, will also influence demand and inflation dynamics. The Bank aims to focus on underlying trends rather than temporary effects when guiding its policy decisions.

The possibility of the incoming US administration imposing new tariffs on Canadian exports has added further uncertainty to economic forecasts.

Consumer Price Index (CPI) inflation has remained around 2% since the summer and is expected to stay close to the 2% target over the next few years. Both upward pressure from housing costs and downward pressure from commodity prices have shown signs of easing since October, as expected. The temporary GST holiday is anticipated to reduce inflation temporarily, with the effect reversing after the holiday concludes. Core inflation measures will be used to assess the inflation trend.

Due to the economy operating within excess supply and recent indicators pointing to softer-than-expected growth, the Governing Council chose to lower the policy interest rate to support growth and keep inflation near the midpoint of the 1-3% target range. The policy interest rate has been significantly reduced since June, and the Bank will assess the need for further rate cuts on a decision-by-decision basis, guided by incoming data and the inflation outlook. The Bank reaffirms its commitment to maintaining price stability by keeping inflation close to the 2% target.

The next announcement regarding the overnight rate target is scheduled for January 29, 2025; on that date, the Bank will also publish a full economic and inflation outlook in the Monetary Policy Report.