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BoC Delivers Jumbo Interest Rate Cut, Signals Slower Pace of Reductions Ahead

BoC Delivers Jumbo Interest Rate Cut, Signals Slower Pace of Reductions Ahead

The Bank of Canada (BoC) has announced another significant interest rate cut, marking its fifth consecutive reduction since June and bringing the central bank’s key rate down to 3.25%. However, Governor Tiff Macklem cautioned that future rate cuts will likely proceed slowly.

The central bank’s decision to lower its policy rate by half a percentage point on Wednesday was widely anticipated following the November labour force survey, which revealed that the unemployment rate had risen to 6.8%.

BoC Cuts Rate to 3.25%, Slower Cuts Ahead

Macklem explained that the BoC opted for two sizable rate cuts because economic growth no longer needs to be restricted, as inflation has returned to the target range. Yet, he indicated that a more gradual approach to monetary policy is likely going forward.

“The governing council has reduced the policy rate substantially since June, and those cuts will work their way through the economy,” Macklem said. “With the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected.”

The current policy rate sits at the upper bound of the neutral rate range, which the Bank of Canada estimates to be between 2.25% and 3.25%. The neutral rate is the interest rate level that neither stimulates nor restrains economic growth.

Macklem also noted that economic growth in the third quarter was weaker than previously forecasted and highlighted concerns about the potential impact of U.S. tariffs on the Canadian economy. He described the tariffs as a significant risk, warning that such measures would disrupt the Canadian and U.S. economies if implemented.

Looking ahead, the Bank of Canada expects economic growth to slow in 2025 due to the federal government’s reduction in immigration. New economic forecasts will be released on January 29, following the U.S. presidential inauguration.

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Economists now forecast that the Bank of Canada will adopt a more modest approach to rate cuts in 2025. CIBC’s Avery Shenfeld wrote that although the BoC is done with “the big guns,” it still has room to ease rates further to support economic growth. CIBC predicts the BoC will reduce its rate by a quarter point in the next four meetings, bringing it to 2.25%.

RBC economist Claire Fan expects the benchmark rate to reach 2% by mid-2025, suggesting that the Bank of Canada will need to lower rates into a more stimulative territory to reinvigorate economic growth.

The federal Liberals, who have struggled politically amid rising inflation and interest rates, welcomed the rate cut. Prime Minister Justin Trudeau celebrated the decision, calling it “a step in the right direction to bring down costs for Canadians.” At the same time, Finance Minister Chrystia Freeland hailed it as “good news”, indicating that the government’s economic plan is working.

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