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The Bank of Canada Trims Another 50 Basis Points to End the Year

Canadian Economics

By: Walter Bolduc

  • The Bank of Canada cut its target for the overnight rate to 3.25 per cent, the Bank rate to 3.75 per cent, and the deposit rate to 3.25 per cent.
  • In their announcement, the Bank of Canada indicated that the pace of cuts is likely to slow, with lower interest rates likely to take some time to fully materialize in the economy.
  • The Canadian economy grew by 1.0 per cent in the third quarter, with business investment, inventories and exports weighing on growth. Fourth quarter growth looks to be weaker than the Bank’s October Monetary Policy Report projection.
  • New government policies, such as the temporary suspension of the GST on some goods, and reductions to targeted immigration levels will affect the outlook for near-term growth and inflation in Canada. The Bank will focus on underlying trends to guide its policy decisions.
  • The possibility of US tariffs from the incoming administration has increased uncertainty and blurred the Bank’s economic outlook. The worry of tariffs has weakened the Canadian dollar, which could put upward pressure on inflation.
  • The economy is in excess supply, and recent indicators have tilted towards softer growth than projected by the Bank in October. CPI inflation has resided around 2.0 per cent since the summer and is expected to average close to the Bank’s 2.0 per cent target over the coming years. Upward pressure on inflation from shelter and downward pressure on goods prices have moderated as expected.
  • The global economy is generally growing in line with the Bank’s expectations. The U.S. economy continues to show strength, but price pressures are persisting. Indicators point to weaker growth in the euro area. China’s policy actions and stronger exports are helping growth, but consumer spending remains an issue.

Key insights

Another cut is welcome news. Today’s announcement provides relief for households as lower interest rates will ease borrowing costs. With plenty of mortgage renewals incoming in 2025 and 2026, household finances should remain stable given the recent rate cuts, allowing consumer spending to pick up heading into next year.

Unemployment ticked up to 6.8 per cent in November. Excluding 2020 and 2021, the increase brings the unemployment rate to its highest level since January 2017. Lower interest rates and weaker population growth will contribute to a declining unemployment rate going forward.

Businesses are less worried about interest rates. In our latest survey on business confidence, 35.1 per cent of business leaders cited higher interest rates as a factor affecting their planned expenditures. This marks the first time since early 2022 that under 40 per cent of respondents cited interest rates as a concern when making capital investments. The focus among business leaders has now shifted toward government policies with close to half of the survey respondents identifying this as their top concern.

Tariffs could impact Canada’s economic outlook. President-elect Trump has touted plans to put tariffs on Canadian imports as high as 25 per cent across all products. Although this number is unlikely, any additional tariffs would present challenges to Canada’s economy. The automotive sector, for example, employes over one hundred thousand Canadians and is highly integrated with the U.S. market. Any tariffs, especially if Canada retaliates, would also be inflationary and could alter the Bank of Canada’s current interest rate trajectory.

For further information into the rapidly changing economic environment, please visit GrowthNow—our real-time forecast of Canada’s economic growth.

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