The Bank of Canada lowered its key interest rate by half a percentage point on Wednesday but signalled a slower pace of rate cuts moving forward.
The decision marked the fifth consecutive reduction since June and brings the central bank’s key rate down to 3.25 per cent.
Forecasters were widely expecting the jumbo interest rate cut after the November labour force survey showed the unemployment rate rose to 6.8 per cent.
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Governor Tiff Macklem said in his prepared statement that the central bank opted for two large rate cuts in a row because economic growth doesn’t need to be restricted anymore, now that inflation is back at its target.
However, he signalled that the central bank will likely slow down the pace of cuts.
“The governing council has reduced the policy rate substantially since June, and those cuts will work their way through the economy,” Macklem said.
“With the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected.”
The bank’s benchmark rate now sits at the upper bound of the neutral rate range.
The neutral rate, which the central bank estimates is somewhere between 2.25 per cent and 3.25 per cent, reflects a theoretical interest rate that will neither help nor hinder economic growth.
Macklem mentioned in his remarks that economic growth came in weaker than the Bank of Canada had forecast for the third quarter and recent data points to weaker growth in the final quarter as well.
Looking ahead, the central bank says it expects economic growth next year to be weaker than previously forecast due to the federal government’s reduction in immigration.
Economists are now widely anticipating the Bank of Canada will scale back its interest rate cuts in 2025 to quarter-percentage point reductions.
“The Bank of Canada signalled that it’s done with the big guns, but it likely still has bullets to fire as it eases rates with an eye to accelerating economic growth ahead,” wrote CIBC chief economist Avery Shenfeld in a client note.
CIBC expects the central bank will lower its policy rate by a quarter-point at its next four meetings, bringing it to 2.25 per cent.
Federal Liberals, who have been struggling to make a political comeback since inflation and interest rates took off, were quick to celebrate the rate cut.
Prime Minister Justin Trudeau called it “a step in the right direction to bring down costs for Canadians.”
Finance Minister Chrystia Freeland said the rate cut was “good news” and suggests the government’s economic plan is working.
This report by The Canadian Press was first published Dec. 11, 2024.
