Bank of Canada cuts key interest rate to 3.25%

The Bank of Canada lowered its key policy rate by 50 basis points to 3.25% on Wednesday, signaling a shift toward a more gradual approach for future rate adjustments. This marks a departure from earlier messaging that emphasized the need for continuous easing to support economic growth.

Governor Tiff Macklem acknowledged for the first time that potential tariffs on Canadian exports by the incoming U.S. administration under President-elect Donald Trump present "a major new uncertainty." Trump has proposed a 25% tariff on all Canadian exports unless stricter border controls are implemented, adding further challenges to the economic outlook.

The 50 basis point reduction, while anticipated, is notable as it represents the first instance since the pandemic that the central bank has implemented consecutive large rate cuts. Macklem, speaking at a press conference, stated, "With the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected." He emphasized that future decisions would be made on a case-by-case basis and that monetary policy no longer needs to remain in restrictive territory.

Currently, the policy rate is at the upper limit of the bank's neutral range—a zone where rates neither hinder growth nor stimulate excessive economic activity. Following the announcement, the Canadian dollar strengthened, with the loonie trading 0.29% higher at 1.414 against the U.S. dollar, equivalent to 70.72 U.S. cents. Financial markets are pricing in a 70% likelihood of an additional 25 basis point rate cut in January.

Inflation has reached the central bank’s target of 2%, and Macklem reiterated the importance of fostering stronger economic growth. Canada’s economy expanded at an annualized rate of just 1% in the third quarter, falling short of the central bank’s forecasts. The bank has warned that fourth-quarter growth may also underperform and cited planned reductions in immigration levels as a potential factor in weaker 2025 growth projections.

In addition to the impact of immigration policy, the central bank is assessing the effects of temporary fiscal measures such as a proposed sales tax rebate and a possible one-time cash handout by the government. Macklem indicated the bank would focus on underlying trends rather than temporary factors when shaping monetary policy.

With this latest reduction, the Bank of Canada has cut its benchmark rate five times within six months, totaling a 175-basis-point decrease. This pace of easing is unmatched among major central banks.