Bank of Canada cuts benchmark rate by 50bps

Ottawa — The Bank of Canada (BoC) slashed its key policy rate by 50 basis points (bps) to 3.25% on Wednesday and indicated that further cuts would be more gradual, a shift from previous messaging that continuous easing was needed to support growth.

Bank of Canada governor Tiff Macklem also said for the first time that the possibility the incoming Trump administration might impose tariffs on Canadian exports represented “a major new uncertainty”.

The 50bps cut, while widely expected, marks the first time since the pandemic that the central bank has implemented consecutive big cuts. In a Reuters poll of economists, 80%, or 21 out of 27 respondents, predicted that the bank would cut the overnight rate by 50bps. The rest forecast a quarter-point reduction.

“With the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected,” Macklem said in opening remarks at a press conference.

The bank would be evaluating the need for further cuts one decision at a time, he said, noting that monetary policy no longer needed to be clearly in restrictive territory.

The policy rate is now at the top end of the bank's so-called neutral range, which is considered to be the band within which rates are just enough not to restrict growth but not stimulate it either.

“It says that the economy as a whole is not in an especially strong place,” said Andrew Kelvin, head of Canadian and Global Rates at TD Securities. “The Bank of Canada would like to see growth pick up, which requires, on some level, a more active and robust consumer.”

The Canadian dollar firmed up after the decision, with the loonie trading 0.29% stronger at 1.414 against the dollar.

Currency markets are pricing in a 70% chance of a 25bps cut in January.

Inflation is now at 2%, the bank's target, and Macklem reiterated that he wanted to see growth pick up.

Canada's economy grew at an annualised rate of just 1% in the third quarter, less than the Bank of Canada had predicted. The bank said fourth-quarter growth might be weaker than expected, and that planned reductions in immigration levels could cause 2025 growth to also fall short of forecasts.

Trump has promised to impose tariffs of 25% on all Canadian exports unless Ottawa moves to tighten the border, which Macklem said clouded the economic outlook.

“This is a major new uncertainty,” Macklem said.

As well as analysing the effect of immigration numbers, the Bank will also have to take into account a temporary sales tax rebate and a possible one-off cash handout by the government.

“We are retaining our call that the Bank of Canada ultimately needs to take its policy rate down to 2% by early 2026 as we expect US tariffs to eventually be applied to some Canadian exports,” Royce Mendes, head of macro strategy for Desjardins Group, wrote in a note.

Mendes, who had called for a cut of 25bps, said he expected a number of pauses along the way.

With Wednesday’s reduction, the Bank has now shrunk benchmark borrowing costs five times in a row by 175bps in six months, making it the only major central bank to have reduced borrowing costs at such a rapid pace.

Reuters