Oversized rate reduction arrives amid rising unemployment and sluggish economy
The Bank of Canada has lowered its overnight interest rate by 50 basis points, making a second consecutive oversized cut in response to a spike in unemployment and growing signs of a weakening economy.
The central bank announced its fifth rate reduction of the year on Wednesday morning in a move that brings its target for the overnight rate to 3.25% – a full 175 basis points below its level at the beginning of June.
In its statement, the Bank said reduced immigration in 2025 would probably weigh down on GDP growth, and highlighted that proposals by the incoming Trump administration south of the border including tariffs on Canada had “increased uncertainty and clouded the economic outlook.”
Expectations of a larger-than-usual cut surged after weak economic data released last week showed the jobless rate had jumped to 6.8%, its highest level since 2021, despite employers adding 51,000 jobs in November.
Inflation remains squarely within the central bank’s target range of 1-3%, but the economy has appeared increasingly sluggish in recent months and expanded at an annualized rate of just 1% in the third quarter of the year.
Former Bank of Canada governor Stephen Poloz indicated in recent weeks that he believes the country is in recession, with only immigration helping paint a positive picture of the economy’s health.
Bank rounds off 2024 with jumbo cut
The Bank has been in rate-cutting mode since June, when it trimmed its benchmark rate – which leads prime mortgage rates in Canada – by 25 basis points. Today’s move means it has lowered that rate in every decision since, with two cuts of 0.25% each and two final 50-basis-point drops.
The decision will provide welcome relief to homeowners with variable mortgages and home equity lines of credit (HELOCs) – and further drops are expected in 2025 as the central bank bids to stimulate the economy just enough to stave off a recession while also avoiding an inflation resurgence.
The Bank made today’s decision despite misgivings among some prominent economists. In recent days, Scotiabank Economics vice president Derek Holt said that he “hated” the idea of another oversized cut, while BMO chief economist Doug Porter said there was a case to be made for a more cautious move than a 50-point reduction.
The latest decision marks the Bank’s final rate announcement of 2024, with its first move of next year set to be revealed on January 29.
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