The Bank of Canada delivered a second consecutive interest rate cut of half a percentage point on Wednesday, but signalled the pace of easing may slow as uncertainty builds in the Canadian economy.
The central bank’s policy rate now stands at 3.25 per cent after the fifth rate cut in a row.
The move was widely expected by markets and economists amid signs of a slowdown in Canada’s economy.
Bank of Canada governor Tiff Macklem said in prepared remarks on Wednesday that with the central bank now having “substantially” cut its policy rate since June, future rate decisions will now be taken “one meeting a time.”
“We anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected,” he said. “Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook.”
The central bank’s policy rate broadly sets the cost of borrowing in Canada and is a key input for interest rates Canadians pay on their mortgages and other loans. Monetary policymakers raise the rate to slow spending in the economy and tamp down inflation, and reduce it when it’s time to stimulate growth again.
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While inflation has returned to the Bank of Canada’s target of two per cent, the Canadian unemployment rate rose more than expected in November and real gross domestic product undershot the central bank’s most recent forecasts in the third quarter.
Macklem on Wednesday signalled that the Bank of Canada is also expecting growth to come in weaker than expected in the final quarter of 2024.
He also pointed to significant new sources of uncertainty in the Canadian economy and emerging dynamics that will have impacts on the inflation outlook. These include the federal government’s two-month GST holiday and the threat of tariffs imposed by United States president-elect Donald Trump when he takes offer in January.
He added that the economic outlook is “clouded” by whether the tariffs on Canadian exports are actually implied, and whether Canada responds with retaliatory tariffs in kind.
On Ottawa’s plan to waive the GST and HST on certain grocery items and other goods for a two-month span, Macklem said he expected that relief would lower inflation to around 1.5 per cent in January, but he noted that effect would be “unwound” after the tax “holiday” ends in mid-February.
Macklem said that the central bank would “look through effects that are temporary and focus on underlying trends to guide its policy decisions.” He said that inflation is likely to remain around two per cent, on average, “over the next couple of years.”
The Bank of Canada will be out with new forecasts taking into account these myriad of factors when it makes its next interest rate decision on Jan. 29.
More to come…
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