Decision comes after weak jobs numbers and deteriorating currency values
The Bank of Canada (BoC) announced today that it will be cutting its policy interest rate another 0.50 per cent, bringing that rate down to 3.25 per cent. The ‘jumbo’ cut follows a jobs report that showed unemployment hitting a post-pandemic high of 6.8 per cent, despite the economy adding jobs. Before the announcement, investors had largely priced in the likelihood of a 50 basis point cut.
Inflation, the core driver behind the BoC’s steep interest rate hikes in 2022 and 2023, seems to have largely come back to the Bank’s target rate of 2 per cent. At its last meeting in October, the BoC cut rates by 50 basis points following an inflation print that fell well below that target. More recent CPI numbers have sat at around 2 per cent, but jobs figures appear to have taken centre stage in most economists’ views.
“A number of policy measures have been announced that will affect the outlook for near-term growth and inflation in Canada. Reductions in targeted immigration levels suggest GDP growth next year will be below the Bank’s October forecast. The effects on inflation will likely be more muted, given that lower immigration dampens both demand and supply,” a press release accompanying the decision reads. “Other federal and provincial policies—including a temporary suspension of the GST on some consumer products, one-time payments to individuals, and changes to mortgage rules—will affect the dynamics of demand and inflation. The Bank will look through effects that are temporary and focus on underlying trends to guide its policy decisions.”
The value of the Canadian dollar has also deteriorated against the USD in Q4, falling from $0.74 to $0.71 USD since the end of September. Policy rate divergence has played a role in this deterioration, according to analysts, with the Fed cutting later and shallower than the BoC — a reflection of the US economy’s relative strength. The threat of tariffs under the incoming Trump administration has also contributed to some weakness in the Canadian dollar.
“The global economy is evolving largely as expected in the Bank’s October Monetary Policy Report (MPR). In the United States, the economy continues to show broad-based strength, with robust consumption and a solid labour market,” the release reads. “Global financial conditions have eased and the Canadian dollar has depreciated in the face of broad-based strength in the US dollar.”
The release continues, “In addition, the possibility the incoming US administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook.”
