Bank of Canada Reduces Interest Rate and Signals Slower Policy Adjustments Ahead

The Bank of Canada reduced its benchmark interest rate by 50 basis points for the second consecutive time, bringing the policy rate to 3.25%. This move, expected by both markets and economists, signals a more cautious approach to further rate cuts moving forward. The decision marks a shift in tone, with the Bank now anticipating a gradual easing of rates as the economy evolves.

Why the Rate Cut Was Expected

Since June, the Bank of Canada has reduced its key interest rate by 175 basis points across five consecutive decisions. The latest 50 basis point cut brings the rate to the top of the Bank’s neutral range (between 2.25% and 3.25%). The decision was made after inflation returned to the target level of 2%, and with a weakened economy that no longer requires restrictive monetary policy. Governor Tiff Macklem explained that the policy rate now “no longer needs to be clearly in restrictive territory.”

A Gradual Approach to Future Cuts

The Bank’s latest decision reflects a shift in its stance on future rate reductions. Previously, the Bank signaled further cuts if the economy aligned with forecasts. However, the latest statement dropped this forward guidance, indicating that rate decisions will now be evaluated “one meeting at a time,” based on evolving economic conditions.

The Impact of Economic Challenges

The Bank’s decision was influenced by slower-than-expected growth, rising unemployment (reaching 6.8% in November), and potential trade uncertainties. A key concern is the threat of new tariffs on Canadian exports to the United States, which could significantly affect economic growth and business investment. If tariffs are imposed, the Bank might need to make further rate cuts.

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Looking Ahead: Gradual Easing Expected

Despite the uncertainties, the Bank of Canada intends to take a more measured approach going forward. As Macklem emphasized, future decisions will depend on ongoing assessments and the economic outlook in January. The Bank remains open to further reductions, but it will approach future cuts with caution, one decision at a time.