The Bank Of Canada Cuts Key Interest Rate to 3.25%

From Governor Macklem’s Monetary Policy Decision Press Conference Opening Statement:

On economic growth: “Canada’s economy grew by 1% in the third quarter, which was slower than we expected. Recent data also suggest growth will be lower than projected in the final quarter of this year. Growth in the third quarter was pulled down by business investment, inventories and exports. But consumer spending and housing activity both picked up, as lower interest rates started to boost household spending.”

On employment: “Canada’s job market is still softening. Businesses have continued hiring, but the number of people looking for work has been increasing faster than the number of jobs. The unemployment rate rose to 6.8% in November. It has been especially hard for young people and newcomers to Canada to find work.”

On inflation: “CPI inflation has been about 2% since the summer, and we expect it to be close to target, on average, over the next couple of years. We thought elevated shelter price inflation would continue to ease, and it has. And the downward pressure on inflation from goods prices has also moderated as predicted…While the upward and downward pressures on prices have been moderating, risks to the inflation outlook remain. Elevated wage increases combined with weak productivity could push inflation up. Or the economy could keep growing below its potential, which would pull inflation down.”

On the threat of U.S. tariffs on Canadian exports: “The economic outlook is clouded by the possibility of new tariffs on Canadian exports to the United States. No one knows how this will play out in the months ahead—whether tariffs will be imposed, whether exemptions get agreed, or whether retaliatory measures will be put in place. This is a major new uncertainty.”

When the Bank first cut its key lending rate to 4.75% in June, the banks responded by lowering their prime rate to 6.95%, followed by two additional cuts to 6.45%. As the BoC’s interest rate decisions influence the prime rate, it is widely expected that the ‘Big Six Banks’ will again lower their prime rate to 5.45% sometime today, which is good news for holders of variable-rate mortgages and other loans. 

The central bank reiterated its intention to support growth while still keeping inflation in the middle of the 1% to 3% target range: “The Bank is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target,” said Macklem. 

However, he no longer shared any certainty on the speed or timing of future rate cuts.

“The Governing Council has reduced the policy rate substantially since June, and those cuts will be working their way through the economy. Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time,” said Macklem. ”In other words, with the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected. Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook.”

During the press conference when asked more specifically over whether Canadians should expect future cuts or be prepared for a pause, Macklem replied: “We’ve lowered interest rates substantially at the last two meetings. We expect we will be considering further reductions, but we’ll be taking a more gradual approach. One at a time.”

For context: “At 3.25%, the Bank has brought down the overnight rate to the top end of what they view as the range of neutral (2.25% to 3.25%), and they got there in lightning speed (six months),” notes Douglas Porter, Chief Economist and Managing Director, Economics, BMO. “Now they can stand back and assess how the economy is handling that big easing and also wait to see how the tariff threats play out.”

While Macklem is taking a somewhat non-committal stance, analysts broadly forecast continued easing into 2025:

Douglas Porter, Chief Economist and Managing Director Economics, BMO: “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 BoC has directly signalled 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 bp 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 U.S. tariffs are imposed on Canada.”

James Orlando, Director and Senior Economist, TD Economics: “We don’t think the BoC 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 trend. Stronger growth will validate that it can cut at a slower pace. If it doesn’t, policy rate differentials with the U.S. will widen even more. And with tariffs potentially coming on Jan. 20th, the combination would likely push the loonie into the mid-60 U.S. cent range.”

Randall Bartlett, Senior Director of Canadian Economics, Desjardins: “While today’s rate cut was in line with market expectations, the tone in the press release was more hawkish. At 3.25%, the policy rate has reached the top end of the Bank’s range for the neutral rate—the estimated policy rate when inflation is at 2% and output has returned to trend. That implies monetary policy is no longer restrictive. As such, the Bank intends to evaluate the need for future rate reductions one meeting at a time and will be guided by incoming information. For that reason, we don’t expect any further 50 basis point rate cuts in the foreseeable future. Given the impending wall of mortgage renewals and worsening economic outlook, we remain of the view that the BoC will need to reduce the policy rate to 2.00% by early 2026.“

Taylor Schleich and Warren Lovely, Economists, National Bank of Canada: “If the economy evolves as we expect (i.e., more sluggishness), we don’t think the Bank will hesitate to cut further. Rather, they’re now just likely to make more standard-sized adjustments from here (i.e., 25 bps). And keep in mind, the Bank’s outlook for the economy has been among the most optimistic out there. Perhaps the bar for disappointment (and thus further cuts) isn’t all that high. In addition, more vague rate guidance is consistent with growing uncertainty on the horizon (most notably, on trade, fiscal and immigration policy). At this point, we’re still looking for the Bank to cut 25 basis points in January, subject to incoming data and developments in Ottawa and Washington.”

Avery Shenfeld, Chief Economist, CIBC World Markets: “We are looking for economic growth to pick up in 2025 to just under 2%, but that will require some combination of monetary or fiscal stimulus. For now, the fiscal measures haven’t moved the needle enough to do the job on their own, so we’re sticking to our projection for the overnight policy rate to ease by a quarter point at the next four decision dates, and troughing at 2.25%. But there are risks from tariffs that could take policy rates lower, or major fiscal stimulus in Canada that could substitute for lower rates. We’ll know more on the latter front after the mid-year fiscal update next week.”

Claire Fan, Economist, Royal Bank of Canada: “We expect per-person GDP to remain soft in the near-term, and [the] unemployment rate will keep edging higher before levelling out at around 7% early in 2025. Persistent softening in the economy into 2025 should ultimately motivate the Bank of Canada to cut rates down to stimulative territory, at 2%.”