The question heading into today’s rate decision was not whether the Bank of Canada would cut, but by how much: 0.25 or 0.5 percentage points.

Our call, solidified after last week’s soft jobs report, was that the Bank would go jumbo (0.5 points) for the second straight meeting. And that’s exactly what they delivered today, bringing the policy rate from 3.75% to 3.25%—the lowest since October 2022.

This was just a rate announcement—no new forecasts (we get a new Monetary Policy Report from the Bank at the end of January). So we’re left dissecting the statement and press conference remarks.

Our quick take: Clearly the Bank of Canada doesn’t want to be behind the curve. Inflation is at target and there is plenty of slack in the economy—why not move lower faster? With this second jumbo move, the Bank hopes this will help prevent the economy from cooling too much, at least more than needed to keep inflation at 2%. Even with this latest cut, policy will remain restrictive with households and businesses still adjusting to past hikes. If inflation flares up again, the Bank can simply hold longer at the current rate.

Why wait?

The Bank of Canada decided it didn’t need to. Inflation in Canada is already at the Bank’s 2% target and the economy is running with excess supply. It’s speeding towards the neutral rate, which it estimates at 2.25-3.25% (our latest forecast for the terminal, neutral rate is 2.5%).

Too weak to ignore

In the end, the Bank saw enough weakness in the Canadian economy and underlying inflation to make a jumbo move today. A quick recap of some recent data:

• Sluggish headline growth. Third quarter GDP growth slower than the Bank’s forecast, and per capita GDP has fallen for six straight quarters.
• Labour market slack. Private sector job creation has been very tepid, and the unemployment rate hit 6.8% in November—the highest since January 2017 (outside the pandemic period).
• Inflation rate at target.  2% in November and inside the 1-3% control range every month since January 2024.

There were a number of references to the soft economic backdrop in today’s statement, including a reference to the year finishing on a weaker than expected note: “In Canada, the economy grew by 1% in the third quarter, somewhat below the Bank’s October projection, and the fourth quarter also looks weaker than projected.”

As for the labour market, the Bank noted in the opening press conference statement that jobs are not keeping up with the number of people looking for work. The Bank noted “it has been especially hard for young people and newcomers to Canada to find work.”

On immigration, the Bank noted that reduced targets will lower its forecast for GDP growth next year (we will need to wait for January to find out how much), but said the net effect on inflation will be ‘muted’.

There was mention of lingering wage pressures (“wage growth…remains elevated relative to productivity”), but the emphasis was on lower-than-expected growth and falling inflation. The forward-looking paragraph in the statement led with this:

“With inflation around 2%, the economy in excess supply, and recent indicators tilted towards softer growth than projected, Governing Council decided to reduce the policy rate by a further 50 basis points to support growth and keep inflation close to the middle of the 1-3% target range.”

Concerns have been raised that recent policy measures intended to bolster affordability could take the Bank off track. But, as we suspected, the Bank said they will “look through effects that are temporary and focus on underlying trends to guide its policy decisions.”

What about the exchange rate? Diverging from the U.S. on rates has already put downward pressure on the loonie, raising import costs. But we also sense the Bank would also welcome the export-boosting qualities of a lower exchange rate, especially with tariff threats looming. The Canadian economy is underperforming the U.S. and inflation is falling faster. Hence, the Bank feels it can move faster than the Fed.

What does the Bank make of Trump’s latest Tariff threat? They did not give much guidance (again, no new forecast today), but framed the threat as adding new uncertainty:  “the possibility the incoming US administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook.“

How did we get here?

It started in the spring, when the Bank of Canada adopted a more dovish tone. A brief and simplified timeline:

• April - Getting more confident, but waiting to see more progress on inflation  
• June - Inflation cooperates, the Bank cuts by 0.25 percentage points
• July-September - Economy slowing, the Bank warns of downside risks and cuts twice by 0.25 percentage points; in the U.S., the Federal Reserve (the Fed) cuts by 0.5 points in September 
• October - Inflation falls below 2% target, the Bank cuts 0.5 percentage points 
• November - The Fed cuts by 0.25 points

What’s next?

The Bank of Canada is more concerned about downside risks and more confident that it can lower rates without reigniting inflation. With inflation pressures easing, we believe the Bank will keep the rate cutting streak alive. The pace will depend on the upcoming data, but our current call is for three 0.25 percentage point moves in the first half of next year—bringing the policy rate to 2.5% by mid 2025. This more gradual pace is consistent with guidance today from the Bank in the press conference: “with the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected.”

Implications

Lower, but still higher than before. While on the descent, the policy rate will remain higher than it was before the rate hikes. If we’re right, about 2.25 percentage points higher.

More relief for variable-rate borrowers. Variable-rate loan rates will continue to decline, alongside the policy rate. But fixed rates, say 3 to 5 years, have already come down as the bond markets have priced in future rate cuts - far less movement can be expected there.

Confidence will improve, but the consumer needs time. Consumers have pulled back in response to a prolonged period of high inflation and rate hikes. Per capita spending has declined in Alberta and across Canada. Lower interest rates and renewed confidence that we’re entering a period of lower inflation will result in a stronger pace of spending in 2025.

Lower rates will attract new home buyers, but demographics will continue to play the dominant role. Alberta has bucked the national slowing trend in housing since 2022, in large part driven by inflows of interprovincial migrants. Other regions like Edmonton have caught Calgary’s real estate fever, with sales and prices in that market picking up. We see more prospective buyers moving off the sidelines with these lower rates.

Challenges remain after the cuts. Monetary policy is a blunt instrument—it cannot solve all of Canada’s economic challenges. Improving Canada’s productivity performance, as we’ve discussed in detail, is near the top of the list.

As 2024 slides into our collective rearview mirror, our trivia questions for the rest of December are looking back at the most important economic trends of the year. Enjoy our 12 Days of Economic Trivia for 2024.

Answer to the previous trivia question: The oil patch is a crucial driver of Alberta’s economy. The latest report from the Alberta Energy Regulator shows that oil production in October averaged 4.2 million barrels per day compared to 2.9 million barrels per day in October 2014.

Today’s trivia question: Alberta’s population growth has been red hot recently. How many people were added to the provincial population between mid-2023 and mid-2024?