Bank of Canada reduces key interest rate by half a percentage point

The Bank of Canada announced a 50 basis point reduction of its key interest rate, cautioning about the uncertain economic outlook in Canada due to potential tariffs from the incoming U.S. administration.

The Bank lowered its policy rate from 3.75 percent to 3.25 percent, marking the fifth consecutive rate cut since June 2024. While the Bank mentioned that these cuts have helped bring inflation back down to around its 2 percent target, various factors have led to concerns about lower economic growth in 2025 than previously projected.

Bank of Canada Governor Tiff Macklem stated in the rate announcement on Dec. 11, “The economic outlook is clouded by the possibility of new tariffs on Canadian exports to the United States. This is a major new uncertainty.”

Canada’s economy expanded by 1 percent in the third quarter of 2024, which was slightly below the Bank’s initial projection. The growth was influenced by decreased business investment and exports, while consumer spending and housing activity showed slight increases.

The unemployment rate rose to 6.8 percent in November, particularly affecting young people and new immigrants in their job search.

The Bank noted that Canada’s dollar has depreciated, paralleled with a strong labor market, while Europe faced weaker growth and China observed stronger exports but subdued household spending.

Inflation has been hovering around 2 percent since the summer and is anticipated to remain near this target in the coming years. The Bank indicated that upward pressure from shelter and downward pressure from goods prices have both moderated as predicted.

The Bank suggested that recent reductions in immigration by the federal government could dampen both inflation and GDP growth. It was also mentioned that the government’s two-month GST holiday is likely to temporarily lower inflation before reverting back when the holiday concludes.

The Bank warned about further inflation fluctuations depending on economic performance, wages, productivity levels, and potential U.S. tariffs.

Macklem mentioned that with the Bank’s policy rate now significantly lower, they will assess the need for additional rate reductions on a case-by-case basis moving forward.