BoC Responds to Economic Pressures with Back-to-Back 50 bps Rate Cuts

On December 11, the Bank of Canada announced a second consecutive 50-basis-point rate cut, aligning with market expectations. This decision was influenced not only by economic indicators but also by newly announced federal, provincial, and foreign policies, including a temporary suspension of the GST, additional one-time payments to individuals, changes in mortgage rules, and uncertainty regarding potential new U.S. tariffs on Canadian exports.

Last Friday, Statistics Canada released its Labour Force Survey, reporting a 0.3 percentage point increase in the unemployment rate to 6.8%—the highest since January 2017 (excluding the pandemic). Unemployment has been steadily rising since April 2023, with a cumulative increase of 1.7 percentage points. Inflation reached the BoC's target of 2% in October and is expected to remain stable, with upward pressure from shelter costs balanced by downward pressure on goods prices.

Factors contributing to the percentage change in real GDP, Q2 2024. Source: Statistics Canada

GDP growth in the third quarter slowed to 1.0% compared to the 2.1% growth experienced in the second quarter. During the Bank’s October announcement, Governor Tiff Macklem projected 1.2% GDP growth for 2024. These projections have since been revised downward, with updated figures expected to be released on Monday, December 16.

The decision to cut interest rates by another 50 bps was also shaped by uncertainties tied to new federal, provincial, and international policies. The federal government has announced a 2 month GST/HST suspension in order to boost consumption and household spending. Additionally, the government has proposed various one-time payments to individuals such as a $250 rebate for Canadians. Additionally, there has been a lot of uncertainty surrounding the possibility of tariffs imposed on Canada announced by Donald Trump after his re-election. The details haven’t been disclosed yet, however, given that in 2023, 78% of Canada’s exports were directed to the US, the implications of tariffs would have significant consequences on the Canadian economy.

With rising unemployment and stable inflation at 2%, market participants are expecting another rate cut on January 29. The widening target rate gap between the U.S. and Canada, now exceeding 100 bps following today’s decision, has placed additional downward pressure on the Canadian dollar relative to the U.S. dollar. The Federal Reserve’s next target rate announcement on December 18 is expected to include a 25 bps rate cut, with a 96.4% probability according to Bloomberg’s World Interest Rate Probability. If realized, this could provide modest relief to the Canadian dollar.

World Interest Rate Probability (source: Bloomberg) December 11th, 2024

World Interest Rate Probability (source: Bloomberg) December 11th, 2024

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