The Bank of Canada reduced its key interest rate by half a percentage point on Wednesday, bringing the overnight rate to 3.25%, with the bank rate now sitting at 3.5% and the deposit rate at 3.25%.
Bank of Canada Governor Tiff Macklem made the announcement Wednesday morning.
“Our policy focus is now keeping inflation close to target,” Macklem said.
The economy grew by 1% in the third quarter, which was somewhat below what the central bank had predicted in October. Similarly, the fourth quarter is also proving to be weaker than predicted.
According to the Consumer Price Index, inflation has hovered around 2% since the summer and is expected to remain there over the next several years.
However, Macklem said that elevated wage increases combined with weak productivity still pose a threat to inflation.
“In addition, the economic outlook is clouded by the possibility of new tariffs on Canadian exports to the United States,” he added. “No one knows how this will play out in the months ahead. Whether tariffs will be imposed, what exemptions get agreed or whether retaliatory measures will be taken.”
Macklem called this a “major new uncertainty.”
Pressure on inflation was brought on by shelter costs while the downward prices of goods helped to moderate it.
The GST holiday will lower inflation as well but only temporarily, likely returning pressure once the break ends.
“Third-quarter GDP growth was pulled down by business investment, inventories and exports,” reads the bank’s release. “In contrast, consumer spending and housing activity both picked up, suggesting lower interest rates are beginning to boost household spending.”
While global financial conditions have eased, the Canadian dollar has depreciated in response to the U.S. dollar gaining strength.
“Governing Council decided to reduce the policy rate by a further 50 basis points to support growth and keep inflation close to the middle of the 1-3% target range,” reads the release.
“Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time.”
The Bank of Canada will announce its next overnight rate target on Jan. 29, 2025.
