Bank of Canada Cuts Rates, Signals More Gradual Approach

The Bank of Canada (BOC) slashed its key policy rate by 50 basis points to 3.25% on Wednesday, aiming to address slower economic growth, reports Reuters. However, Governor Tiff Macklem indicated that future rate cuts would be more gradual, emphasizing that he does not anticipate a recession.

Canada's economy has contracted on a per capita basis for six consecutive quarters, with most growth driven by population increases. Macklem highlighted several factors contributing to uncertainty in the growth outlook, including a planned reduction in immigration levels, a government sales tax break, federal and provincial cash handouts, and the potential threat of US tariffs.

"There are some mixed signals in the data... We did chew through that," Macklem told a news conference, but noted that monetary policy no longer needed to be overly restrictive.

The 50 basis point cut marks the first instance of consecutive large-scale rate reductions by the central bank since the pandemic. While 80% of economists surveyed by Reuters predicted a 50 basis point cut, Macklem signaled a shift in strategy toward more measured easing.

"With the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected," Macklem stated.

Macklem also acknowledged, for the first time, the potential impact of President-elect Donald Trump's administration on Canadian exports, citing the threat of tariffs as a significant new source of uncertainty.

"If those things happen, certainly they will have a big impact on the Canadian economy, and will have a dramatic effect on our forecast," Macklem said.

Trump has threatened to impose tariffs on all Canadian exports unless Ottawa tightens border security, creating further economic clouds.

The Canadian dollar strengthened following the BOC's announcement, with the loonie trading 0.29% higher against the US dollar. Currency markets are currently pricing in a 70% probability of a 25 basis point rate cut in January.

Inflation currently stands at 2%, the BOC's target, and Macklem reiterated his desire to see economic growth accelerate.

Canada's economy expanded at an annualized rate of just 1% in the third quarter, below the BOC's initial predictions. The bank indicated that fourth-quarter growth might be weaker than anticipated, and that planned immigration reductions could further dampen 2025 growth forecasts.

The BOC will need to carefully consider the impact of temporary government measures, such as the sales tax rebate and potential cash handouts, when determining future policy. Macklem emphasized that the BOC would focus on underlying economic trends rather than short-term fluctuations.

"We are retaining our call that the Bank of Canada ultimately needs to take its policy rate down to 2.00% by early 2026 as we expect U.S. tariffs to eventually be applied to some Canadian exports," Royce Mendes, head of macro strategy for Desjardins Group, wrote in a note to Reuters.

The BOC's recent actions stand in stark contrast to other major central banks, making it the only one to have cut borrowing costs at such a rapid pace in recent months.

"It says that the economy as a whole is not in an especially strong place," said Andrew Kelvin, head of Canadian and Global Rates at TD Securities.