The Bank of Canada delivers another 0.5% interest rate cut

Wesley Blight

December 11, 2024

Key takeaways

The Bank of Canada reduced its policy interest rate further to 3.25%.
Inflation is near 2%, but near-term growth is soft and unemployment is elevated.
The threat of U.S. tariffs is an uncertainty, but they did not materially influence the rate cut decision.

In its final monetary policy meeting of 2024, the Bank of Canada (BOC) delivered another 0.5% interest rate cut—bringing the target for the overnight rate to 3.25%. With third quarter growth coming in lower than what the BoC projected in October, fourth quarter growth also tracking behind estimates and unemployment rising to 6.8% in November, the larger cut was mostly anticipated by markets.

Policy rates are substantially lower as the BoC has cut rates five consecutive times, totaling 1.75%, since June. “Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time,” said the Bank. Moreover, BoC Governor Tiff Macklem said he expects a more gradual approach to monetary policy going forward, marking a small shift in the Bank’s stance since October. Previously, it had signaled pretty clearly that further cuts were coming.

Canadian economic growth slower than expected

Business investment, inventories and exports have really dragged on Canadian Gross Domestic Product (GDP) growth. The reduction in immigration targets will likely continue the trend as less immigration can be expected to lower both demand and supply.

As previously noted, unemployment rose, but this can be attributed to employment growth lagging behind labour force growth. On a more positive note, both consumer spending and housing activity have increased, suggesting policy easing is having the desired effect.

Consumer Price Index inflation remains around 2% and is expected to stay there over the short term. “Since October, the upward pressure on inflation from shelter and the downward pressure from goods prices have both moderated as expected,” said the Bank. Additionally, the GST break may also temporarily lower inflation further.

And for those keeping score, while the Canadian dollar jumped following the rate announcement, it is at its lowest level relative to the U.S. dollar since the early part of 2020.

The threat of U.S. tariffs increases uncertainty

Dominating the Q&A session following the Bank’s press conference were questions about U.S. tariffs and the influence it may have had on the rate cut decision. While conceding that new U.S. tariffs are a “major uncertainty,” Tiff Macklem succinctly said, "we can't run policy on something that might happen."

The base case still looks good

The base case scenario for a soft economic landing, should see equities continue to appreciate. With that said, significant upside may be limited due to already high valuations and market concentration. The incoming U.S. administration, geopolitical risk, and still weaker growth out of the Eurozone remain some of the key risks.

The BoC’s next interest rate announcement is scheduled for January 29^th in the new year and will be accompanied by the latest Monetary Policy Report.

Wesley Blight

Wesley Blight, CFA, CIM, FCSI, is a Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. He is responsible for private asset and multi-asset portfolio solutions.

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