Bank of Canada Interest Rate Announcement (December 11, 2024)

Bank of Canada delivers another supersized cut

• The Bank of Canada (BoC) cut its overnight rate by 50 basis points, to 3.25%, while stating that it will continue with Quantitative Tightening (QT). 
• The bank highlighted that economic growth has been weaker than they expected, stating that "the economy grew by 1% in the third quarter, somewhat below the Bank’s October projection, and the fourth quarter also looks weaker than projected." 
• Inflation is less of a concern for the central bank, which was made clear when it stated "inflation has been about 2% since the summer, and is expected to average close to the 2% target over the next couple of years."
• The bank referenced the confluence of factors that are muddying the outlook. These included the impact of the government's new immigration strategy, new mortgage rules, the GST holiday and one-time payments from governments, and the threat of tariffs. 
• On the future path of policy, the bank seems more cautious, stating that is has already "reduced the policy rate substantially since June" and that it "will be evaluating the need for further reductions in the policy rate one decision at a time."

Key Implications

• The recent rise in the unemployment rate alongside weaker-than-expected GDP was enough to convince the BoC that another supersized rate cut was warranted. We think this misses the forest for the trees. The rise in the unemployment rate is missing the fact that hiring has reaccelerated over the last few months, while underlying growth momentum has been robust with consumer spending driving fundamental demand. Not to mention, the real estate market has caught fire once again. 
• 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.

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