In a decisive move to bolster the economy, the Bank of Canada delivered a widely expected 50-basis-point interest rate cut in its final policy decision of 2024.
This was the second straight half-point cut, a relatively aggressive move for the central bank. Analysts were quick to parse the Bank’s announcement, concluding future cuts will be smaller. The key policy rate is now within the Bank’s neutral range of 2.25%-3.25%. Market watchers predict a “wait and see” approach from policymakers as the effects of multiple rate cuts work their way through the economy, with improvements expected to materialize in the coming months.
“We will be evaluating the need for further reductions in the policy rate one decision at a time,” the Bank of Canada stated in its policy announcement. This marks the fifth consecutive cut, totaling 175 basis points of rate relief.
The loonie rallied following the announcement, trading at C$1.4145 per USD, recovering from nearly C$1.42 (its lowest level in four years) the day before.
However, economists voiced concerns over the potential fallout from steep tariffs proposed by US President-elect Donald Trump. They warn that things could go pear-shaped for the economy if a 25% tariff is imposed on Canadian imports.
The following is commentary issued by economists in notes to clients in response to the Bank of Canada’s overnight rate decision.
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“Canadian central bankers chose to roll the dice with a second consecutive 50 basis point rate cut. Policymakers cited weaker-than-expected third-quarter growth and a higher unemployment rate in justifying the move. Moreover, central bankers lowered their 2025 GDP growth outlook on the back of immigration reductions. With inflation around 2%, the economy underperforming its potential and the outlook clouded by tariff threats, officials seemed comfortable making another big splash. However, today’s decision was more about the cadence of easing rather than the ultimate end goal.
“Importantly, central bankers are no longer saying that Canadians should expect further rate cuts. The guidance now simply says that officials will be evaluating the need for further reductions one decision at a time. In the opening statement to Governor Macklem’s press conference, he says that Canadians should expect a more gradual approach to policy easing now that the level of rates is lower. That likely erases any possibility that the central bank cuts by another 50 basis points and increases the odds that the Bank of Canada pauses rate cuts at one of its upcoming decision dates. A pause would give officials time to assess how past rate cuts are feeding through after this aggressive pace of easing.
“While we still anticipate the central bank will ease another 25 basis points in January, the bar for sequential cuts after that is now higher. We are retaining our call that the Bank of Canada ultimately needs to take its policy rate down to 2% by early 2026 as we expect US tariffs to eventually be applied to some Canadian exports.”
James Orlando, director and senior economist at TD Bank
“The recent rise in the unemployment rate alongside weaker-than-expected GDP was enough to convince the Bank of Canada that another supersized rate cut was warranted. We think this misses the forest for the trees. The rise in the unemployment rate is missing the fact that hiring has reaccelerated over the last few months, while underlying growth momentum has been robust with consumer spending driving fundamental demand. Not to mention, the real estate market has caught fire once again.
“We don’t think the Bank of Canada will keep cutting at this current pace. The policy rate is in the bank’s ‘neutral’ range (2.25% to 3.25%), which means it probably thinks its rate is no longer weighing on economic growth. The central bank will also be getting more evidence over the coming months that economic growth is stabilizing around a trend. Stronger growth will validate that it can cut at a slower pace. If it doesn’t, policy rate differentials with the US will widen even more. And with tariffs potentially coming on Jan. 20, the combination would likely push the loonie into the mid-60-US-cent range.”
Avery Shenfeld, senior economist at CIBC Economics
“Forget the meaningless little wiggles in inflation, because with unemployment on the rise, and growing uncertainties over US tariffs, there was ample reason for the Bank of Canada to deliver another larger dose of interest rate relief today. That matched our long-held call for two successive 50 bp cuts and leaves the overnight rate only a quarter point lower than what we had forecast way back in the fall of 2023 for the end of this year.
“The overnight rate is now at the top end of the 2.25% to 3.25% range that the Bank puts on its estimate of the neutral rate. If neutral is at the midpoint of that range, or 2.75%, that might be enough to return to quarter-point cuts as policymakers start to look for signs that they’ve done enough. The statement gave a hint in that direction, saying they had now eased ‘substantially’ and would be taking decisions one meeting at a time. But unless we get a material dose of fiscal stimulus for 2025, the sluggish growth path and considerable economic slack call out for a monetary policy setting that at least dips into stimulative territory. We’re therefore sticking to our target for a series of quarter-point cuts to take the overnight rate to 2.25% by mid-2025.”
Ashish Dewan, senior investment strategist at Vanguard Canada
“The Bank of Canada has shifted its focus towards growth, and we expect continued policy easing with a 2025 year-end-policy-rate near the low end of the [central bank’s] estimate for a neutral rate of 2.25% to 3.25%. This decision was driven in part by a recent interest rate cut by the US Federal Reserve, a jump in Canada’s unemployment rate to multi-year highs, along with a decline in real GDP per capita for the sixth consecutive quarter.
“Looking ahead, the Bank of Canada will carefully weigh the risks of further weakening in the Canadian dollar, the impact of a new stimulus in the form of [C$250 rebate] checks sent to millions of Canadians by the government, and the potential for igniting upward pressure on the housing market as it considers further cuts in its policy rates.”
Stephen Brown, deputy chief North America economist at Capital Economics
“Although the Bank of Canada cut interest rates by another 50-basis-point today, the accompanying communications were more hawkish than might have been expected, with the Bank no longer indicating that further cuts are guaranteed and instead noting that it ‘will be evaluating the need for further reductions in the policy rate one decision at a time.’
“The Bank has not failed to notice the green shoots emerging, noting that ‘consumer spending and housing activity both picked up, suggesting lower interest rates are beginning to boost household spending’ and highlighting the likely boost from the government’s planned tax rebates in the year. Somewhat strangely, the Bank made no mention of the growing upside risks to inflation, such as the recent pick-up in core price growth or the surge in core producer price inflation in the past couple of months amid the weakening exchange rate. The Bank did note that ‘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.’
“In a hawkish change, the Bank replaced the line from recent months that ‘we expect to reduce the policy rate further’ with the more ambiguous ‘we will be evaluating the need for further reductions in the policy rate one decision at a time.’ Additional interest rate cuts still seem likely, however, and in the accompanying opening statement to the press conference, Macklem says they ‘anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected.’”
Douglas Porter, chief economist, BMO Economics
“The Bank retains the crown of most aggressive rate-cutter in the world (no other G10 central bank has cut by more than 125 basis points, and the [US] Fed is at 75 basis points so far). However, even with the meaty cut, the Canadian dollar actually found a footing after the announcement, as the Bank clearly signaled that the pace of cuts will cool markedly in coming meetings, assuming the economy provides no major surprises. While we would not go so far as to say the tone was hawkish, the Opening Statement for the Press Conference was quite direct that they ‘anticipate a more gradual approach to monetary policy.’
“In the short space of six months, the Bank has driven the overnight rate from a highly restrictive 5% level right down to the top end of their estimate of neutral rates at 3.25%. Now, the Bank of Canada has directly signaled that the pace of cuts will slow, perhaps dramatically—the Bank even noted that it will now ‘evaluate the need for further reductions.’ Ultimately, given the slack in the economy, and the cloud over the trade outlook, we look for some further small rate trims of the 25-basis-point variety in 2025, bringing the overnight rate down to 2.50% before mid-year (i.e., at the lower end of neutral). As the Bank notes, the major wildcard is what unfolds on the tariff front, and how Canada responds, suffice it to say, rates are going lower still if broad US tariffs are imposed on Canada.”
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