Bank of Canada Accelerates Monetary Policy Easing to Achieve Soft Landing

The Bank of Canada delivered an oversized interest-rate cut on Wednesday, lowering the benchmark policy rate by half a percentage-point to 3.75 per cent, in an attempt to engineer a soft landing for the Canadian economy. This move follows a string of data showing that both inflation and economic growth in Canada are running below what the bank expected, with price pressures essentially under control. Central bankers are now trying to get borrowing costs back to a neutral level that doesn’t restrain growth to avoid a recession and a further rise in unemployment.

Key Takeaways:

• The Bank of Canada lowered the benchmark policy rate by half a percentage-point to 3.75 per cent, marking the fourth consecutive cut since June and the largest one so far.
• The bank expects to continue lowering interest rates, but the pace of cuts will depend on incoming economic data.
• Financial markets expect the policy rate to fall to around 2.5 per cent by the end of next year.
• Canadians can breathe a sigh of relief as widespread price increases have subsided, but prices for many goods and services will remain higher than before the bout of inflation.
• The bank’s forecast sees economic activity picking up toward the end of the year and into next year, with falling expected to spur business investment and consumer spending on interest-sensitive goods.
• An increase in per-person spending will be partly offset by slowing population growth, following the new federal caps on temporary immigration.
• Interest rate swap markets put the odds of a quarter-point cut above 90 per cent for the next rate decision on December 11.
• Some Bay Street economists think the bank could deliver another oversized move, citing the current 3.75 per cent rate as still in restrictive territory.
• Wednesday’s rate cut should offer some relief to homeowners with variable rate mortgages.
• Canada’s housing market has largely remained dormant since the central bank started lowering rates in June, and the bank has flagged a potential rebound in real estate spending as an upside risk to both growth and inflation.

Statistics:

• The Bank of Canada lowered the benchmark policy rate by 0.5 percentage-points to 3.75 per cent.
• The bank expects the policy rate to fall to around 2.5 per cent by the end of next year.
• Financial market reaction to the announcement was muted, with the yield on two-year Government of Canada bonds falling a few basis points on the news.
• Interest rate swap markets put the odds of a quarter-point cut above 90 per cent for the next rate decision on December 11.
• The Canadian economy is expected to grow 2.1 per cent in 2025 and 2.3 per cent in 2026, up from 1.2 per cent in 2024.
• Per capita GDP growth is expected to turn positive next year.
• The slowdown in population growth is expected to fall from around 2.5 per cent in the second half of 2024 to an average quarterly growth of 1.5 per cent in the coming years.

Sources:

• Globe and Mail
• Bank of Canada
• Canadian Imperial Bank of Commerce
• Bank of Montreal
• LSEG (LSEG data)