MARKET NEWS

By Randy Thanthong-Knight and Erik Hertzberg

(Bloomberg) -- The Bank of Canada made its second straight outsize cut to interest rates and signaled policymakers are ready to slow down their campaign to lower borrowing costs.

Officials led by Governor Tiff Macklem reduced the benchmark overnight rate by 50 basis points to 3.25% on Wednesday, bringing it to a level that they believe is no longer so restrictive for growth. 

US President-elect Donald Trump’s threat to place 25% tariffs on goods the US imports from Canada is “a major new uncertainty,” Macklem said. 

“It’s probably already having some effect on the data” and weighing on business investment, he told reporters in Ottawa. But it’s far from certain whether the Trump administration will implement the tariffs at that rate, whether there will be exemptions and how the Canadian government might retaliate, he said. 

Macklem said the central bank isn’t expecting a recession, though growth is slower than it had forecast. He suggested the jumbo cut — which was anticipated by markets and most economists — would likely be followed by a return to smaller cuts in 2025. 

Officials dropped language from previous statements that said they “expect” to reduce borrowing costs if the economy moves in line with forecasts. This time, the bank said: “Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time.”

Bonds sold off across the curve, with the yield on two-year benchmark debt up 3.3 basis points on the day to 2.921% and the 10-year yield up about 4 basis points to 3.057% as of 11:37 a.m. Ottawa time. The loonie jumped to about C$1.414 per US dollar, the only G-10 currency showing significant strength against the greenback on Wednesday.

In a span of five meetings in roughly six months, the Bank of Canada has lowered its benchmark rate by 175 basis points, becoming one of the most aggressive rate-cutters among the central banks of major economies. The Federal Reserve and the European Central Bank have cut their key rates by 75 basis points this year.  

Outside of the Covid pandemic, it’s the first time since the financial crisis in 2009 that policymakers have made two consecutive cuts of 50 basis points. They’re seeking to boost economic growth that’s been weaker than expected, and to brace for potential tariffs on Canadian exports threatened by US President-elect Donald Trump.

With such swift moves, the Bank of Canada’s policy rate is now 150 basis points below the upper bound of the Federal Reserve rate. It hasn’t been this far below the US since 1997 — a key reason for recent weakness in the Canadian dollar.

While Canadian policymakers expect inflation to be close to the 2% target over the next couple of years, the government’s reduced immigration targets, two-month sales tax holiday, and potential US tariffs may change the outlook for growth and inflation in the months ahead, Macklem said.

Prime Minister Justin Trudeau’s government is suspending sales taxes on certain products starting in mid-December, which is expected to temporarily lower inflation to around 1.5% in January, but that effect would be unwound after the program ends in mid-February, the governor said. And with the level of immigration set to decline, slower population growth will also reduce economic growth, he said.

“Unless we get a material dose of fiscal stimulus for 2025, the sluggish growth path and considerable economic slack calls out for a monetary policy setting that at least dips into stimulative territory,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors. CIBC still expects the overnight rate to fall another percentage point, to 2.25%, by mid-2025. 

Stephen Brown of Capital Economics pointed out the “hawkish change” to the language of the policy statement. 

“That is largely because the 50 basis-point cut means we are now at the top end of the Bank’s 2.25% to 3.25% neutral range estimate. Additional interest rate cuts still seem likely, however,” Brown said in a report to investors.

The bank sees job market as softening, with the number of people looking for work still rising faster than the number of jobs. Rate cuts have spurred consumer spending and housing activity, but growth in the third quarter was pulled down by business investment, inventories and exports.

“Monetary policy no longer needs to be clearly in restrictive territory,” Macklem said. “We want growth to pick up to absorb the unused capacity in the economy to keep inflation close to 2%.”

--With assistance from Jay Zhao-Murray and Carter Johnson.

(Updates with additional information from the news conference, starting in the fourth paragraph.)