Announcement comes amid heightened trade tensions with the United States and falling inflation
The Bank of Canada announced today that it will cut its policy interest rate by another 25 basis points to three per cent.
The decision comes with some support from December data, notably the total CPI inflation number which remains at 1.8 per cent, below the central bank’s two per cent target. While CPI-trim and CPI-median are somewhat higher at 2.5 per cent and 2.4 per cent respectively, the inflation picture appears to support further easing by the BoC.
GDP growth, too, is tracking at 1.7 per cent for Q4 of last year, which is below the BoC’s forecasted rate of two per cent. Unemployment dropped unexpectedly to 6.7 per cent in December, with the economy adding 91,000 jobs.
“CPI inflation remains close to 2%, with some volatility due to the temporary suspension of the GST/HST on some consumer products,” a press release accompanying the announcement reads. “Shelter price inflation is still elevated but it is easing gradually, as expected. A broad range of indicators, including surveys of inflation expectations and the distribution of price changes among components of the CPI, suggests that underlying inflation is close to 2%. The Bank forecasts CPI inflation will be around the 2% target over the next two years.”
The US Federal Reserve is set to announce its own policy rate decision later today. Expectations are that Fed Chair Jerome Powell will hold interest rates steady at the 4.25 per cent to 4.5 per cent range, which would result in a policy divergence between US and Canadian central banks of over one per cent.
The release also came with projections in the January Monetary Policy Report.
“Projections in the January Monetary Policy Report (MPR) published today are subject to more-than-usual uncertainty because of the rapidly evolving policy landscape, particularly the threat of trade tariffs by the new administration in the United States,” the release reads.
The threat by President Donald Trump to impose 25 per cent tariffs on all Canadian goods by February 1st is a significant threat that many economists expect play a role in the BoC’s decision. Tariffs of that size could cost as much as 6 per cent of Canada’s GDP, according to a monetary policy report from 2019. If those cuts manifest, it could significantly alter the path of Canada’s interest rate cuts.
“Since October, financial conditions have diverged across countries,” the release reads. “US bond yields have risen, supported by strong growth and more persistent inflation. In contrast, yields in Canada are down slightly. The Canadian dollar has depreciated materially against the US dollar, largely reflecting trade uncertainty and broader strength in the US currency.”
