Bank of Canada Announces 50 Basis Point Reduction, Setting Policy Rate at 3.25%

The Bank of Canada has decreased its overnight rate target to 3.25%, with the Bank Rate set at 3.5% and the deposit rate at 3.25%. This action continues the Bank's policy of balance sheet normalization.

Global economic trends largely align with the Bank's October Monetary Policy Report (MPR) projections. The US economy remains strong, exhibiting robust consumption and a healthy labor market, although inflation is holding steady with some persistent price pressures. The Eurozone shows signs of slowing growth, while China's economy benefits from recent policy measures and strong exports, but faces challenges from weak household spending. Global financial conditions have eased, and the Canadian dollar has weakened against a strengthening US dollar.

Canada's economy expanded by 1% in the third quarter, slightly below the Bank's October forecast, with weaker-than-anticipated growth expected in the fourth quarter. Business investment, inventories, and exports contributed to this slower growth, while consumer spending and housing activity increased, suggesting that lower interest rates are stimulating household spending. Recent revisions to national accounts data have upwardly revised GDP levels over the past three years. The unemployment rate climbed to 6.8% in November, reflecting slower employment growth than labor force expansion. Wage growth shows signs of moderating but remains elevated compared to productivity.

Several policy initiatives will affect Canada's short-term growth and inflation outlook. Lower immigration targets will likely reduce GDP growth next year compared to the October forecast, while the impact on inflation is anticipated to be less significant. Federal and provincial policies, including a temporary GST reduction on certain goods, one-time payments to individuals, and mortgage rule changes, will influence demand and inflation. The Bank will prioritize underlying economic trends in its policy decisions, looking past temporary impacts.

Furthermore, the potential for new US tariffs on Canadian exports introduces uncertainty and clouds the economic forecast.

CPI inflation has stabilized around 2% since the summer and is projected to average near the 2% target in the coming years. The upward pressure from shelter costs and downward pressure from goods prices have eased as expected since October. The temporary GST reduction will briefly lower inflation, with a subsequent reversal after its expiration. Core inflation measures will help guide assessment of CPI inflation trends.

Given the 2% inflation rate, excess supply in the economy, and recent indicators suggesting weaker-than-projected growth, the Governing Council opted for a further 50 basis point reduction in the policy rate to support growth and maintain inflation within the 1-3% target range. Following substantial rate reductions since June, the Bank will evaluate the need for further reductions on a decision-by-decision basis, guided by incoming data and its assessment of implications for inflation. The Bank remains dedicated to maintaining price stability for Canadians, keeping inflation close to the 2% target.