Bank of Canada interest rate statement and press conference opening statement

Below is the full text of the Bank of Canada interest rate statement:

The Bank of Canada lowered its target for the overnight rate to 3¼% today, with the Bank Rate at 3¾% and the deposit rate at 3¼%. The Bank continues with its policy regarding balance sheet normalization.

The global economy is changing to a large extent as predicted in October by the Bank Monetary Policy Report (MPR). In the United States, the economy continues to show broad strength, with strong spending and a strong labor market. US inflation has been holding steady, with some price pressures continuing. In the euro area, recent signs point to weaker growth. In China, recent policy actions combined with strong exports are supporting growth, but household spending remains subdued. Global financial conditions have deteriorated and the Canadian dollar has depreciated despite broad strength in the US dollar.

In Canada, the economy grew 1% in the third quarter, slightly below the Bank's October projection, and the fourth quarter also looks weaker than expected. Third quarter GDP growth was dragged down by business investment, investments and exports. In contrast, consumer spending and housing activity both picked up, indicating that lower interest rates are beginning to boost housing consumption. Historical revisions to the National Accounts have increased the level of GDP over the past three years, largely reflecting higher investment and consumption. The unemployment rate rose to 6.8% in November as employment continued to outpace the workforce. Wage growth showed some signs of easing, but remains high relative to productivity.

Several policy measures have been announced that will affect the outlook for near-term growth and inflation in Canada. A reduction in targeted immigration levels suggests that next year's GDP growth will be lower than the Bank's October forecast. The impact on inflation is likely to be more subdued, as lower immigration reduces demand and supply. Other federal and provincial policies – including a temporary suspension of the GST on some consumer products, one-time payments to individuals, and changes to mortgage regulations – will affect demand dynamics and inflation. The Bank will look past temporary effects and focus on fundamental trends to guide its policy decisions.

In addition, the possibility that the incoming US administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook.

CPI inflation has been around 2% since the summer, and is expected to be close to the average target of 2% over the next year or so. Since October, the upward pressure on inflation from shelter and the downward pressure from commodity prices have both changed as expected. Looking ahead, the GST holiday will bring down inflation temporarily but that will be permanent once the GST break ends. Measures of core inflation help us assess the trend in CPI inflation.

With inflation around 2%, the economy in oversupply, and recent signs leaning towards softer than expected growth, the Governing Council decided to reduce the policy rate by 50 basis points other to support growth and keep inflation close to the middle of the 1-. Target range 3%. The Governing Council has reduced the policy rate significantly since June. Going forward, we will be assessing the need for further reductions in the policy level one decision at a time. Our decisions will be guided by incoming information and our assessment of its impact on the inflation outlook. The Bank is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target.

Below is the full text of BOC Governor Tiff Macklem's opening press conference statement:

Good morning. I am pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our policy decision.

Today, we cut policy interest rates by 50 basis points. This is our fifth consecutive reduction since June and takes our policy rate to 3¼%.

Monetary policy has worked to bring inflation back to the 2% target. Our policy focus now is to keep inflation close to target.

Let me describe what we see in the economy, and how that played into our decision.

In the United States, the economy continues to show general strength and inflation has been holding steady. The US dollar has appreciated against most other currencies, including the Canadian dollar.

The Canadian economy grew by 1% in the third quarter, which was slower than we expected. Recent data also indicates that growth will be lower than expected in the last quarter of this year.

Growth in the third quarter was dragged down by business investment, investments and exports. But consumer spending and housing activity both picked up, as lower interest rates began to boost household consumption.

Canada's job market continues to deteriorate. Businesses have continued to hire, but the number of people looking for work has been increasing faster than the number of jobs. The unemployment rate rose to 6.8% in November. It has been particularly difficult for young people and newcomers to Canada to find work.

A number of policy measures have been announced which will affect the outlook for growth and inflation in the coming months. The most important of these are reduced immigration targets, which indicate that next year's GDP growth will be lower than we expected in October. The effects of lower population growth on the inflation outlook are likely to be more subdued as reduced immigration reduces both demand and supply in the economy. We'll have more to say about this when we issue our next forecast in January.

Other federal and provincial government policies – including temporary GST breaks on some consumer products, one-off payments to individuals, and changes to mortgage rules – are likely to affect household consumption dynamics and inflation in the coming months. Again, we'll have more to say on this in January. As always, we will look past temporary effects and focus on fundamental trends to guide our policy decisions.

CPI inflation has been around 2% since the summer, and we expect it to be close to target, on average, over the next year or so. We thought that high inflation in shelter prices would continue to ease, and it has. And the downward pressure on inflation from commodity prices has also changed as expected. We expect the GST holiday to reduce inflation to around 1½% in January, but that effect will be limited after the GST break in mid-February. We look at measures of core inflation to help us assess the trend in CPI inflation.

While upward and downward pressures on prices have eased, risks to the inflation outlook remain. Rising wages combined with weak productivity could increase inflation. Or the economy could continue to grow below its potential, which would drag down inflation.

In addition, the economic outlook is clouded by the possibility of new tariffs on Canadian exports to the United States. No one knows how this will play out in the coming months – whether taxes will be imposed, whether exemptions will be approved, or whether retaliatory measures will be put in place. This is a major new uncertainty.

In summary, inflation is back to the 2% target and lower interest rates are starting to feed through to stronger household spending. But the economy is still undersupplied and the growth outlook now appears softer than we expected in October.

With inflation back on target, we have cut the policy rate by 50 basis points at each of the last two decisions as monetary policy no longer clearly needs to be in a tight range. We want to see growth pick up to absorb the unused potential in the economy and keep inflation close to 2%.

The Governing Council has reduced the policy rate significantly since June, and these cuts will work through the economy. Going forward, we will be assessing the need for further reductions in the policy level one decision at a time.

In other words, with the policy rate now significantly lower, we expect a more gradual approach to monetary policy if the economy generally develops as expected. Our decisions will be guided by incoming information and our assessment of its impact on the inflation outlook.

The Bank is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target.

With that, the Senior Deputy Governor and I would be happy to take your questions.

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Here are some of the most important comments from Governor Macillem's speech, quoted directly:

1. “Monetary policy has worked to bring inflation back to the 2% target. Our policy focus now is to keep inflation close to the target.”

2. “CPI inflation has been around 2% since the summer, and we expect it to be close to target, on average, over the next year or so.”

3. “We look at measures of core inflation to help us assess the trend in CPI inflation.”

4. “Rising wages combined with weak productivity could increase inflation.”

5. “With inflation back on target, we have cut the policy rate by 50 basis points at each of the last two decisions as monetary policy no longer clearly needs to be in a tight range.”

6. “Going forward, we will be evaluating the need for further reductions in the policy level one decision at a time.”

7. “In other words, with the policy rate now significantly lower, we expect a more gradual approach to monetary policy if the broader economy changes as expected.”

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The USDCAD was trading at 1.4182 just ahead of the decision.

The price is moving lower with the first target at the 1.4145 level broken. That rate is in line with swing rates going bcak over the past few weeks. The 100 hour moving average at 1.41277 is a key target level to get to and through followed by a swing range between 1.40869 and 1.41045.