Bank of Canada Rate Announcement

The Bank of Canada has reduced its overnight rate target to 3.25%, with the Bank Rate at 3.5% and the deposit rate at 3.25%, while continuing its balance sheet normalization. Globally, economic trends are in line with the October Monetary Policy Report (MPR). The U.S. economy shows resilience with strong consumption and labor market conditions, though inflation remains steady. The euro area faces weaker growth, while China’s policy actions and exports support growth despite subdued household spending. Global financial conditions have eased, and the Canadian dollar has weakened against a strong U.S. dollar.

In Canada, third-quarter GDP growth was 1%, below projections, with business investment, inventories, and exports dragging growth. Conversely, consumer spending and housing activity improved, reflecting the effects of lower interest rates. Revisions to National Accounts raised the GDP level over three years due to higher investment and consumption. The unemployment rate increased to 6.8% in November as employment growth lagged labor force expansion. Wage growth is easing but remains high relative to productivity.

Policy changes, including reduced immigration targets, a temporary GST suspension, and one-time payments, will impact near-term growth and inflation. Lower immigration is expected to reduce GDP growth and have muted inflation effects by dampening demand and supply. Temporary GST relief will lower inflation but normalize after the break ends. Potential U.S. tariffs on Canadian exports add uncertainty to the outlook.

CPI inflation remains near 2%, aligned with the Bank’s target, with inflation pressures moderating. To address excess economic capacity and slower growth, the Bank cut the policy rate by 50 basis points. Further rate changes will depend on economic and inflation data. The Bank remains committed to price stability, targeting inflation around 2%.

During the subsequent press conference, Governor Tiff Macklem said, “Monetary policy has worked to bring inflation back to the 2% target. Our policy focus now is to keep inflation close to target.” Furthermore, the economic outlook is uncertain due to the potential for new tariffs on Canadian exports to the United States. How this situation will unfold in the coming months remains unclear—whether tariffs will be implemented, exemptions negotiated, or retaliatory actions taken. This represents a significant new source of uncertainty.

In summary, with inflation reaching the 2% target and household spending increasing due to lower interest rates, the Bank of Canada expects to adopt a more measured approach to monetary policy, assuming the economy evolves as projected.