BRITISH COLUMBIA – The Bank of Canada lowered its overnight policy rate by 50 basis points for the second consecutive meeting, bringing it from 3.75 to 3.25 per cent.
In the statement accompanying the decision, the Bank noted that GDP growth in the second half of the year is falling below forecast and the unemployment rate has ticked slightly higher and cited the possibility of tariffs on Canadian exports to the United States as increasing uncertainty and clouding the economic outlook.
The Bank expects that inflation will average close to its 2 per cent target over the next couple of years. Finally, the Bank stated that after substantial reductions in the policy rate in reaction to softer growth, going forward it will be evaluating the need for further reductions in the policy rate one decision at a time.
With both the economy and inflation undershooting the Banks expectations, policymakers appear eager to get the economy back on a path to recovery, particularly with risks looming large in 2025. The Bank has now lowered its overnight rate to the top-end of what it considers “neutral” for the economy but, considering the trajectory of the economy, it will likely have to continue cutting.
Where the Bank’s policy rate ends up depends on how serious to take threats of punitive tariffs by the incoming Trump administration. We anticipate that, for now, the Bank will cut to either 2.5 or 2.75 per cent early in 2025 and then pause to assess the state of the economy and the need for further stimulus.
