- Randall Bartlett
Senior Director of Canadian Economics
Essentials of Monetary Policy
The Bank of Canada is Two and Through with 50-Basis Point Rate Cuts
December 11, 2024
According to the Bank of Canada (BoC)
- In line with the widely held view of economists and markets, the BoC cut the overnight policy rate by 50 basis points to 3.25% today. This is the second jumbo cut in a row and the fifth consecutive rate reduction since the BoC began in June, after reaching a peak of 5.00% in July 2023. The Bank also left its quantitative tightening program unchanged.
- To justify the outsized rate cut, the Bank pointed to weaker-than-expected economic activity since the October Monetary Policy Report (MPR) and a deteriorating outlook. According to the press release External link. that accompanied the announcement, Q3 real GDP growth came in below the Bank’s tracking (1.0% annualized versus 1.5% expected) and Q4 is also tracking lower than the Bank’s 2% projection. The surge in the November unemployment rate to 6.8% earned a nod too. The Bank said it would look through the temporary boost to growth and drag on inflation from the impending GST holiday (e.g., reducing January inflation to an estimated 1.5%), as well as the one-time payments to individuals (graph 1). Looking further ahead, “reductions in targeted immigration levels suggest GDP growth next year will be below the Bank’s October forecast (graph 2) … In addition, the possibility the incoming US administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook.” We have included all of these factors in our latest projection.
- In his press conference opening statement External link., BoC Governor Tiff Macklem stated that, “With inflation back to target, we have cut the policy rate by 50 basis points at each of the last two decisions because monetary policy no longer needs to be clearly in restrictive territory. We want to see growth pick up to absorb the unused capacity in the economy (graph 3) and keep inflation close to 2% ... Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time … Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook.” Notably, Governor Macklem failed to mention that recent real GDP revisions have reduced the excess capacity in the Canadian economy relative to the estimate published in the October 2024 MPR.
Implications
While today’s rate cut was in line with market expectations, the tone in the press release was more hawkish. At 3.25%, the policy rate has reached the top end of the of Bank’s range for the neutral rate—the estimated policy rate when inflation is at 2% and output has returned to trend. That implies monetary policy is no longer restrictive. As such, the Bank intends to evaluate the need for future rate reductions one meeting at a time and will be guided by incoming information. For that reason, we don’t expect any further 50 basis point rate cuts in the foreseeable future. Given the impending wall of mortgage renewals and worsening economic outlook, we remain of the view that the BoC will need to reduce the policy rate to 2.00% by early 2026.
2024 Schedule of Central Bank Meetings
