Bank of Canada delivers second straight half-point cut, bringing key interest rate to 3.25%

12:00 p.m.

What’s next?

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– Mark Rendell

• The Bank of Canada’s next interest rate decision is on Jan. 29. The bank will also publish its quarterly Monetary Policy Report with new forecasts for inflation and economic growth.
• Governor Tiff Macklem will give a speech in Vancouver on Dec. 16 at 12:35 p.m. PT (3:35 p.m. ET), followed by a press conference.
• Finance Minister Chrystia Freeland will release the federal government’s fall economic statement on Dec. 16. This will offer a snapshot of Ottawa’s finances and outline any new federal economic initiatives.
• Statistics Canada will publish November Consumer Price Index inflation numbers on Dec. 17. October GDP numbers come out on Dec. 23.
• The U.S. Federal Reserve will announce its next interest-rate decision on Dec. 18. It is expected to cut by a quarter-point, bringing the federal funds rate range to 4.25 per cent to 4.5 per cent.

11:30 a.m.

Rogers on the Canada’s housing market

– Matt Lundy

Bank of Canada senior deputy governor Carolyn Rogers on housing:

“What we’ve seen in housing recently is a pretty big uptick in activity, and it’s come without a commensurate uptick in prices. So that’s actually been quite good news. There’s some mortgage rule changes to come, another 50-basis-point cut. We know housing is very sensitive to interest rates, so we do expect some more pick-up [in activity]. Whether the reduction in immigration will sort of act as a counterbalance to that, that’s very possible. We’ll have to keep an eye on it. But so far, an increase in activity without an increase in prices is a good thing for the Canadian economy right now.”

11:25 a.m.

Macklem on the Canadian dollar

– Matt Lundy

Bank of Canada Governor Tiff Macklem on the Canadian dollar, which is trading at four-year lows, relative to the U.S. dollar:

“We actually don’t forecast the Canadian dollar. … We don’t target the exchange rate. We target inflation. … And in fact, the flexible exchange rate is a key part of the framework. It’s what allows us to run monetary policy geared to the needs of the Canadian economy. … Most of that depreciation in the Canadian dollar is really an appreciation in the U.S. dollar. The U.S. dollar has been strong against pretty much every other currency. If you look at the Canadian dollar relative to major currencies other than the U.S. dollar, it’s actually very little changed. The fact that the Canadian dollar is weaker, that is actually one of the channels through which monetary policy works. A lower Canadian dollar makes Canadian exports more competitive in the U.S. and so that will add demand to the Canadian economy. It also makes imported goods more expensive, so that can also have some impact on inflation. So those are both things that we will need to take into account in the conduct of monetary policy.”

11:05 a.m.

Economists react to today’s Bank of Canada rate cut

– Darcy Keith

Here’s how economists have reacted to today’s decision:

Royce Mendes, managing director and head of macro strategy, Desjardins Securities

“While we still anticipate the central bank will ease another 25 basis points in January, the bar for sequential cuts after that is now higher. We are retaining our call that the Bank of Canada ultimately needs to take its policy rate down to 2 per cent by early 2026 as we expect U.S. tariffs to eventually be applied to some Canadian exports. However, we do expect a number of pauses along the way.”

Douglas Porter, chief economist with BMO Capital Markets

“Ultimately, given the slack in the economy, and the cloud over the trade outlook, we look for some further small rate trims of the 25-basis-point variety in 2025, bringing the overnight rate down to 2.50 per cent before mid-year (i.e., at the lower end of neutral). As the bank notes, the major wildcard is what unfolds on the tariff front, and how Canada responds; suffice it to say, rates are going lower still if broad U.S. tariffs are imposed on Canada.”

James Orlando, director and senior economist, TD Economics

“The recent rise in the unemployment rate alongside weaker-than-expected GDP was enough to convince the BoC that another supersized rate cut was warranted. We think this misses the forest for the trees. The rise in the unemployment rate is missing the fact that hiring has reaccelerated over the last few months, while underlying growth momentum has been robust with consumer spending driving fundamental demand. Not to mention, the real estate market has caught fire once again.

We don’t think the BoC will keep cutting at this current pace. The policy rate is in the bank’s “neutral” range (2.25 per cent to 3.25 per cent), which means it probably thinks its rate is no longer weighing on economic growth. The central bank will also be getting more evidence over the coming months that economic growth is stabilizing around trend. Stronger growth will validate that it can cut at a slower pace. If it doesn’t, policy rate differentials with the U.S. will widen even more. And with tariffs potentially coming on Jan. 20th, the combination would likely push the loonie into the mid-60 US cent range.”

Taylor Schleich and Warren Lovely, economists with National Bank

“Having now entered the “neutral zone” (estimated by the BoC to be 2.25 per cent to 3.25 per cent), there’s an apparent desire to dial back the pace of easing, which is appropriate in our view. Rate cuts are still likely to be delivered in 2025, but they should be of the garden variety 25 basis point size from here out. Markets interpreted the statement more hawkishly but we view the absence of an explicit rate-cut pledge as reflecting uncertainty and more finely balanced decisions ahead. But as long as the economy evolves as we expect (i.e., more sluggishness), we don’t think the bank will hesitate to cut further. Note that the bank has one of the more optimistic outlooks on the street…. At this juncture, we expect the BoC to reach the lower end of the neutral range next summer which could represent the terminal rate of the cycle. Of course, much will depend on policy action in Ottawa and Washington so this rate outlook will remain fluid.”

Avery Shenfeld, chief economist with CIBC Economics

“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. Note that the bank deemed the measures announced to date as having some impacts, but said it will look through those that are temporary, as we see as likely for both the GST holiday and the one-time cheques. We’re therefore sticking to our target for a series of quarter-point cuts to take the overnight rate to 2.25 per cent by mid-2025.”

Read more here: How markets and economists are reacting to the BoC decision

10:55 a.m.

The latest outsized rate cut is bad news for grocery and gasoline prices

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– Erica Alini

The Bank of Canada’s oversized rate cut today promises to be a double-edged sword for consumers.

On the one hand, the move brings accelerated relief for Canadians with variable-rate mortgages and other loans and as well as lines of credit, which also have floating rates. Those debtors will see their borrowing costs decline faster than analysts expected until recently. And, of course, rapidly falling variable mortgage rates are also a boon for homebuyers and those with upcoming mortgage renewals.

But the larger-than-usual cut also increases the spread between interest rates in Canada and those in the U.S., where the economy is still humming along and borrowing costs remain higher.

Aside from the short-term gyrations of the currency markets, economists expect that widening gap to further weaken the loonie against the U.S. dollar, which would put upward pressure on a number of Canadian imports.

Unfortunately, that promises to hit consumers where it hurts most: at the grocery store and at the pump.

The price of fresh produce is especially sensitive to the U.S. dollar exchange rate during the cold season, when most of Canada’s supply of fruits and vegetables comes from the U.S. or Central and South America. Across the continent, Canadian produce buyers will be using U.S. dollars for purchases. Expect businesses to pass on the extra cost of a terrible exchange rate to grocery shoppers.

And, year round, Canada relies heavily on U.S. refineries for its gasoline, meaning a weak Canadian dollar is bad news for motorists as well.

10:51 a.m.

Macklem on Trump’s tariffs promise

– Matt Lundy

Bank of Canada Governor Tiff Macklem on U.S. president-elect Donald Trump’s vow to impose 25-per-cent tariffs on all imports from Canada:

“We don’t know if those tariffs are going to be implemented. We don’t know if exemptions are going to be agreed on some parts, we don’t know what level of tariffs. We don’t know if Canada will take retaliatory measures. … All those things are very important for determining what this means for the Canadian economy. We can’t run policy on something that might happen. We have highlighted that it is a major uncertainty, and certainly if you’re a business considering making an investment decision, the fact that things are uncertain, that will probably hold back your decisions until there’s more clarity. So it probably is already having some effect on the data. … Look, there’s no question that if these tariffs were to move forward at the level suggested, it would be highly disruptive to the Canadian economy. It would also be very disruptive for the U.S. economy.”

10:47 a.m.

Macklem on Ottawa’s upcoming fall economic statement

– Matt Lundy

Bank of Canada Governor Tiff Macklem was asked about the federal government appearing to abandon some of its self-imposed fiscal guardrails. His response:

“I am a fan of the fiscal guardrails, but we’re all going to get the fiscal update next Monday, and we’ll read it with interest. … Let’s see the whole fiscal update in its totality, and we’ll do the assessment, we’ll discuss it in January.”

Finance Minister Chrystia Freeland will table the fall economic statement on Dec. 16.

10:38 a.m.

Key quotes from Macklem’s press conference opening statement

– Mark Rendell

Outlook for inflation: “CPI inflation has been about 2 per cent since the summer, and we expect it to be close to target, on average, over the next couple of years. We thought elevated shelter price inflation would continue to ease, and it has. And the downward pressure on inflation from goods prices has also moderated as predicted. We expect the GST holiday to temporarily lower inflation to around 1.5 per cent in January, but that effect will be unwound after the GST break ends in mid-February. We will be looking at measures of core inflation to help us assess the trend in CPI inflation.”

Shift to a more gradual pace of easing: “With the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected. Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook.

BoC wants to see growth increase: “With inflation back to target, we have cut the policy rate by 50 basis points at each of the last two decisions because monetary policy no longer needs to be clearly in restrictive territory. We want to see growth pick up to absorb the unused capacity in the economy and keep inflation close to 2 per cent.”

Impact of immigration targets: “A number of policy measures have been announced that will affect the outlook for growth and inflation in the months ahead. The most significant of these is reduced immigration targets, which suggest GDP growth next year will be lower than we forecast in October. The effects of lower population growth on the inflation outlook will likely be more muted because reduced immigration dampens both demand and supply in the economy.”

On potential U.S. tariffs: “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 months ahead – whether tariffs will be imposed, whether exemptions get agreed, or whether retaliatory measures will be put in place. This is a major new uncertainty.”

On fiscal stimulus: “Other federal and provincial government policies – including a temporary GST break on some consumer products, one-time payments to individuals, and changes to mortgage rules – will likely affect the dynamics of household spending and inflation in the months ahead. Again, we will have more to say on this in January. As always, we will look through effects that are temporary and focus on underlying trends to guide our policy decisions.”

10:25 a.m.

Analysis: Don’t expect another oversized BoC rate cut in this cycle

– Matt Lundy

The Bank of Canada made another oversized rate cut on Wednesday. Just don’t expect another one in this cycle.

As is often the case, the key line in Governor Tiff Macklem’s prepared remarks was near the bottom of the text: “With the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected.”

His statement also removed a reference that additional rate cuts would be likely. The central bank’s rate-setting governing council will be judging the need for further cuts one decision at a time, based on incoming data.

Does this mean the Bank of Canada is done cutting rates? No. Analysts on Bay Street generally think the policy interest rate – now at 3.25 per cent, after a half-percentage-point reduction – will wind up at 2.25 per cent or 2.5 per cent. This implies several quarter-point trims over the winter and spring.

But we are shifting away from guaranteed rate cuts. Yes, the economic data are pretty crummy. You only have to take a look at Friday’s jobs report – which showed the unemployment rate has jumped to 6.8 per cent – to get a sense of economic malaise.

Beneath the surface, however, things are stirring. Consumer spending was robust in the third quarter and real estate transactions are reviving from anemic levels. Rate cuts are easing pressure on debt-addled households, freeing up space for other transactions.

Prudence is appropriate for many other reasons. The bank’s press release on Wednesday was peppered with references to a murky outlook for the Canadian economy, beyond the usual risks that are highlighted in these documents.

For one, cuts to immigration levels suggest economic growth will be weaker than the BoC previously forecast. The bank will update its projections in January.

But the biggie is south of the border. Canada faces a massive potential shock from tariffs under the incoming Trump administration – particularly if the president-elect follows through on his vow to impose sweeping 25-per-cent levies on all imports from Canada.

“No one knows how this will play out in the months ahead – whether tariffs will be imposed, whether exemptions get agreed, or whether retaliatory measures will be put in place,” Mr. Macklem said in his statement. “This is a major new uncertainty.”

10:20 a.m.

What the oversized BoC rate cut means for variable and fixed mortgages

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– Rachelle Younglai

Hello variable rate mortgages. This mortgage product developed a bad reputation when the Bank of Canada hiked interest rates by 4.75 percentage points over 2022 and 2023. With every interest rate hike, the variable rate loan became more expensive because the interest rate was moving in lockstep with the central bank’s rate.

But now that the central bank has been aggressively cutting interest rates – including today’s 50-basis-point cut – they are becoming cheaper and may eventually be cheaper than a fixed-rate mortgage, where the interest rate is the same over the term of the loan.

According to MortgageLogic.news, the average five-year fixed mortgage has an interest rate of 4.29 per cent and the average five-year variable mortgage has an interest rate of 5 per cent.

Obviously, there’s still a big difference but if the Bank of Canada continues to cut interest rates even at a slower pace as they have signalled they may do, then eventually, the variable product will cost less.

MortgageLogic.news founder Robert McLister said more borrowers are taking out variable products with every interest rate cut but they still make up a tiny share of the new mortgages.

He said the trauma of the 4.75 percentage point increase is “still too fresh in many borrower’s minds, and many don’t trust that inflation is truly put to bed.”

10:15 a.m.

Markets react to today’s BoC rate cut decision

– Darcy Keith

Since markets were just about fully pricing in the 50-basis-point rate cut, the trading reaction so far has been focused on the more unexpected comments from the Bank of Canada, including that it will take a “more gradual” approach to further easing going forward. In its rate decision statement, the bank also removed an earlier reference to expecting further rate cuts.

The Canadian dollar and bond yields immediately spiked on the 9:45 a.m. announcement and related Bank of Canada commentary. The loonie rose by about a quarter of a US cent to 70.75 US cents. The Canadian two-year bond yield, which had been lower prior to the decision and is particularly sensitive to central bank policy, rose to 2.91 per cent from 2.85 per cent.

Going forward, money markets are now assuming we’ve reached the end of jumbo-sized 50-basis-point rate cuts and that future cuts will be 25 basis points – if at all.

Implied interest rate probabilities in overnight swaps markets suggest a 67 per cent chance of a 25-basis-point cut at the next policy meeting on Jan. 29, and a 33 per cent chance that there will be no change at all to the bank’s overnight rate, according to the latest LSEG data.

The Canadian dollar prior to the announcement was trading at its weakest levels since the start of the COVID-19 crisis in April, 2020, and was down roughly 6 per cent so far this year.

Traders are unambiguously bearish on the domestic currency, with speculators raising their bearish bets on the Canadian dollar to historically high levels. As of Dec. 3, net short had increased to 159,346 contracts from 154,002 in the prior week, the latest data from the U.S. Commodity Futures Trading Commission showed.

The fact that traders are so heavily positioned on the short side suggests the loonie is vulnerable to a sharp spike higher if a short-covering rally emerges.

The chart below shows the total short position (not net) for non-commercial accounts – investors that seek to profit from speculation in the futures market.

10:12 a.m.

Opinion: How much lower can the BoC go?

– Rob Carrick

The Bank of Canada has built some rate-cutting momentum as we head into 2025, which raises the question of how much lower we can go.

Rate forecasts are educated conjecture, but they’re useful in providing guidance for borrowers, savers and conservative investors about what to expect in the months ahead. Borrowers with floating rate debt like a variable-rate mortgage or line of credit will want to know how much more rate relief they can expect. Savers need to know how much more downside there is to returns on safe money so they can find more productive uses for at least some of their cash.

The latest Bank of Canada rate cut will drive these five personal finance trends in 2025

The Bank of Canada’s overnight rate fell a total of 1.75 percentage points in 2024, including the latest cut. Here’s a summary of views from bank economics departments on where the rate will be in late 2025:

• BMO Economics: 2.5 per cent
• CIBC Capital Markets: 2.25 per cent
• RBC Economics: 2 per cent
• Scotiabank Global Economics: 3 per cent
• TD Economics: 2.25 per cent

A few banks are looking out to late 2026 as well, and here they all agree that the overnight rate will end that year unchanged from the level predicted for late 2025. The message here for borrowers and savers is that it’s unlikely we will get back to the low-rate world of 2019, before the pandemic took hold.

The overnight rate back then was 1.75 per cent. We had a nice little thing going that year – reasonable economic growth and low borrowing costs. We may not see anything similar for a while.

10:05 a.m.

What the BoC rate cut means for Canadians looking to buy a home

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– Rachelle Younglai

Real estate experts are predicting that today’s interest rate cut will entice more Canadians to buy a home.

With every interest rate cut this year, more homebuyers have waded back into the market. October’s national sales data – the most recent available – show transactions were at their highest level in more than two years.

Christopher Alexander, president of RE/MAX Canada, sees that trend continuing in the coming months, especially with the easier mortgage policies due to go into effect Dec. 15.

The new rules will allow Canadians to make smaller down payments on pricier homes and first-time buyers will be able to stretch out payments over 30 years instead of 25 years.

According to Mr. Alexander, first-time buyers have been waiting for the rule changes, which will reduce a homebuyer’s monthly mortgage payment but drive up their debt over the long term.

The lower interest rates and the new mortgage rules will be in place in time for the spring, which historically has been the busiest period for real estate sales.

Although home sales have been slow for about two years, Mr. Alexander and other real estate agents do not expect a return to the pandemic’s real estate boom. That’s because there are more properties up for sale and buyers have more choice. And mortgage rates are still substantially higher than they were during the boom.

9:45 a.m.

Bank of Canada cuts rate by half-point to 3.25%

– Mark Rendell

The Bank of Canada cut interest rates by half a percentage point on Wednesday and signalled that it may slow down the pace of rate cuts going forward amid rising economic uncertainty.

As widely expected, the bank’s governing council lowered the policy rate to 3.25 per cent from 3.75 per cent. This was the fifth consecutive rate cut since June and the second oversized move in a row.

With inflation back at the central bank’s 2-per-cent target, policymakers have moved quickly to bring borrowing costs down to a less restrictive level to avoid a recession. Having cut rapidly since the summer, however, the bank appears to be entering a slower phase of the easing cycle.

“With the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected,” Governor Tiff Macklem said in the prepared text of his press conference opening statement.

In its rate decision statement, the bank removed an earlier reference to expecting further rate cuts. “Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time,” the bank said.

While financial markets were anticipating the oversized move, back-to-back half-point cuts are highly unusual. Excluding crises, such as the start of the COVID-19 pandemic, the central bank last delivered two half-point cuts in a row in 2009.

Read more here: Bank of Canada cuts rate by half-point, signals ‘more gradual’ approach to further easing

9 a.m.

Bay Street looking for a half-point cut

– Mark Rendell

Until recently, Bay Street largely expected the Bank of Canada to shift back to a normal quarter-point rate cut in December, after a half-point cut in October. However, a run of weak economic data – capped by a jump in the unemployment rate in the latest jobs numbers, published Friday – has led most analysts and investors to pencil in another 50-basis-point move for Wednesday’s decision.

Interest-rate swap markets, which capture market expectations about monetary policy, put the odds of a half-point cut at just shy of 90 per cent, according to LSEG data. Meanwhile, 21 out of 27 analysts polled by Reuters last week, including economists at Canada’s six big banks, said they expect a half-point cut. The rest are looking for a quarter-point cut.

8:30 a.m.

How BoC interest-rate decisions have unfolded so far in 2024

7 a.m.

Bank of Canada expected to cut rate by another half-percentage-point cut

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– Mark Rendell

The Bank of Canada is expected to deliver another big interest rate cut this morning, after recent economic data showed tepid growth, rising unemployment and inflation that is largely under control.

The decision, however, could be complicated by the weakness of the Canadian dollar. Another large cut would put more distance between Canadian and American interest rates, likely sending the loonie lower against the greenback and pushing up import prices.

Financial markets and most Bay Street analysts are looking for another 50-basis-point cut, which would take the policy rate to 3.25 per cent from 3.75 per cent. That’s the upper end of the bank’s estimate for the “neutral” range – a level of interest rates that neither stimulates nor restrains the Canadian economy.

At the last rate announcement in October, Bank of Canada Governor Tiff Macklem delivered a half-point rate cut and said that the central bank’s postpandemic fight with inflation is largely over. With the annual rate of inflation back around the bank’s 2-per-cent target, monetary policymakers were looking to stimulate growth, rather than restrain it, he said.

The economic data since the October meeting has largely confirmed the need to get borrowing costs down. GDP growth undershot the bank’s forecast in the third quarter, and the unemployment rate jumped to 6.8 per cent in November from 6.5 per cent the month before. That’s the highest jobless rate outside of the pandemic since January, 2017.

In effect, there’s plenty of slack in the Canadian economy that will continue to exert downward pressure on inflation. Interest rates don’t need to be restrictive to maintain price stability.

There are, nonetheless, reasons for the bank to be cautious about another oversized rate cut. The latest inflation numbers showed stickier-than-expected core inflation measures. Meanwhile, real estate activity has started to perk up, and big rate cuts could send home prices spiraling up again in the spring.

Then there’s the Canadian dollar, which is trading at a four-year-low of around 70.5 cents against the U.S. dollar. This weak exchange rate is partly the result of a divergence between the Bank of Canada and the U.S. Federal Reserve, which is cutting interest rates more slowly than the BoC in response to stronger growth and stickier inflation south of the border. Another 50-basis-point cut would put more daylight between the BoC and the Fed and likely send the Canadian currency lower.

The bank will release its rate decision at 9:45 a.m., followed by a press conference by Mr. Macklem and senior deputy governor Carolyn Rogers at 10:30 a.m.

Read more here: Bank of Canada expected to deliver another big cut, despite currency concerns.