Canada Interest Rate

The Bank of Canada cut its key interest rate by 50bps for a second consecutive decision in its December meeting, as expected by markets, to mark 175bps of cumulative rate cuts from this cycle’s peak of 5%. Still, rhetoric from policymakers from the central bank suggested that there will not be any more aggressive rate cuts next year, and officials dropped the statement that borrowing costs are due to be lowered should their base case hold. The sharp interest rate cut followed data showing that the Canadian GDP grew by an annualized 1% in the third quarter, below the central bank’s projections, and growth in the fourth quarter poses the risk of also missing forecasts. Still, other data indicated that consumer spending is higher than anticipated. Lastly, the BoC noted that inflation is expected to remain near the 2% target in the next couple of years, but potential tariffs from the upcoming US presidential administration placed uncertainty on price growth.

The Bank of Canada cut its key interest rate by 50bps to 3.75% in its October 2024 decision, as expected, signaled that it will continue to lower its rate should the economy develop as expected. The decision increased the pace of rate cuts following three 25bps slashes, aligning with recent data that indicated a sharp slowdown in Canadian inflation. Headline price growth fell to 1.6% in September, below the target of 2% for the first time in three years. Also, the bank noted that consumption slowed on a per capita basis and the labor market continued to soften, as the unemployment rate rose to over 6.5% for the first time in over two years, further warranting lower borrowing costs. With the new Monetary Policy Report, policymakers now expect headline inflation to remain close to the target levels for the foreseeable future as upside and downside risks to inflation are roughly balanced out. Also, the bank expects the GDP to expand 1.2% this year before growing a sharper 2.1% next year.

The Bank of Canada cut its key interest rate by 25bps to 4.25% in its September 2024 meeting, as expected, to mark the third consecutive 25bps slash after having left the hiking cycle’s terminal rate of 5% for 10 months. The central bank noted that the extension of its cutting cycle was warranted as excess supply in the Canadian economy continued to put downward pressure on inflation. Additionally, policymakers reiterated some concerns about undershooting inflation targets, adding to their worries of overtightening. Also aligning with the need for looser financial conditions, the Governing Council noted that the labor market continued to slow in recent months, although wage growth remains elevated when compared to productivity. Still, the central bank noted that inflation remains elevated for shelter and selected services, noting that upside risks to price growth are also present.