Bank of Canada overnight rate
- The previous rate was 3.75% after 50 bps on 23 October
- This is the fifth consecutive rate cut
- Economists had widely expected a 50 basis point rate cut
- The market was pricing in a 90% chance of a rate cut
- A previous statement said: “If the economy changes substantially in line with our latest forecast, we intend to reduce the policy rate further” but that was dropped.
- The statement says “Going forward, we will assess the need for further reductions in the policy level one decision at a time”
- A statement says “The Governing Council has reduced the policy rate significantly since June.”
- Macklem's statement says “with the policy rate now significantly lower, we expect a more gradual approach to monetary policy if the economy generally develops as expected.”
- Macklem notes that Q3 GDP growth was lower than BOC expected and Q4 was also lower
- Macklem says the Canadian job market remains soft
- Macklem said consumer and housing improved in Q3 as lower rates boosted spending
- Reduced immigration targets suggest 2025 growth will be slower than BOC's forecast
- The two-month GST tax break will reduce inflation in January and then back in February
- The economic outlook is clouded by the possibility of new tariffs on Canadian exports to the United States, which Macklem says is a “big new uncertainty.”
USD/CAD was trading at 1.4182 ahead of the report compared to a four-year low of 1.4194. The next Bank of Canada rate decision is on January 29th and market prices suggested a 50/50 chance of a cut before today's decision.
There is a clear indication here that they do not intend to continue cutting in 50 basis point increments but do intend to continue reducing rates. The price for January is 17.7 bps, that is 70% and it would get the BOC to 3.00%.
USD/CAD fell to 1.4140 from 1.4082 when the news was released as the clear intention to cut was taken out of the headline, but I think the comments from Macklem discount that.
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