The Bank of Canada today lowered its benchmark interest rate by 50 basis points, setting the target for the overnight rate at 3.25%, alongside a deposit rate of 3.25% and a Bank Rate of 3.75%. This marks another step in the Bank’s efforts to support the economy amid signs of softening growth and inflation hovering near the 2% target.
In a statement, the Bank said its policy of balance sheet normalization remains in place as it navigates an evolving global and domestic economic landscape.
International conditions are playing a key role in shaping Canada’s economic trajectory. The U.S. economy continues to show resilience, supported by strong consumer spending and a robust labour market. However, inflationary pressures persist south of the border. Meanwhile, Europe is facing signs of weakening growth, and while China is benefitting from policy interventions and strong exports, its domestic consumption remains sluggish.
The Canadian dollar has depreciated amid the U.S. dollar’s broad strength, adding complexity to Canada’s economic outlook.
At home, economic growth slowed in the third quarter, with GDP rising by just 1%, falling short of the Bank’s October projections. The fourth quarter is also expected to underperform earlier forecasts. Key drags on growth include weaker business investment, declining exports, and inventory reductions.
However, consumer spending and housing activity have shown signs of life, supported by lower interest rates. Historical revisions to GDP data have highlighted stronger-than-expected investment and consumption over the past three years.
The labour market showed mixed signals, with the unemployment rate ticking up to 6.8% in November as the labour force grew faster than employment. Wage growth has moderated but remains elevated relative to productivity.
A range of federal and provincial policy changes will influence near-term growth and inflation dynamics. Reductions in immigration targets are expected to dampen economic growth next year, though their inflationary impact is likely limited due to balanced effects on supply and demand. Temporary measures, including a GST suspension on certain goods and changes to mortgage rules, will also play into inflation dynamics, though the Bank said it would focus on underlying trends when making future decisions.
Uncertainty around potential U.S. tariffs on Canadian exports adds another layer of complexity to the outlook, clouding growth prospects further.
Inflation has held steady at around 2% since the summer and is expected to remain close to this target in the coming years. The Bank acknowledged that temporary factors, such as the GST holiday, will momentarily lower inflation but are unlikely to affect the longer-term trend.
Today’s rate cut is the latest in a series of reductions aimed at supporting economic activity. The Bank signaled a cautious approach going forward, stating that future decisions will be based on incoming data and the evolving inflation outlook.
“The Governing Council is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target,” the Bank said.
As economic indicators continue to soften, all eyes will be on the Bank’s next move as it seeks to balance growth and inflation stability in a challenging environment.
