–BoC Repeats: Will Take Policy Decisions One Meeting at a Time
–Governor Macklem: Discussed Both Options of 25 and 50 Basis Point Cuts amid Mixed Economic Data
–Macklem: Further Rate Cuts to Be More Gradual Than 2 Consecutive 50-Bps Cuts; Deliberately ‘Pretty Wide Zone’
By Max Sato
(MaceNews) – The Bank of Canada on Wednesday lowered its policy interest rate – the target for overnight lending rates – by another large-size 50 basis points to 3.25%, as widely expected, to prop up slowing economic growth and counter downside risks from Ottawa’s reduced immigration targets and possible new U.S. tariffs on Canadian exports.
But Governor Tiff Macklem stressed that a series of rate cuts that the bank has delivered in the past six months are “substantial” and that he and other policymakers at the bank will take a “more gradual” approach toward lowering interest rates further.
“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,” the bank said in a statement.
“Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time,” the bank said. “Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook.”
The bank also decided to continue its policy of quantitative tightening to trim the bank’s balance sheet to a normal level. The process is likely to end sometime next year when the bank will resume normal purchases of government bonds.
Wednesday’s move follows a 50-basis point cut in October and three 25-basis point cuts since June when the bank began unwinding the effects of its past aggressive tightening, delivering a total of 175 basis points (1.75 percentage points) in credit easing in a short space of six months, much faster than other leading central banks.
Canada also faces “a major new uncertainty,” the BoC said. U.S. President-elect Donald Trump has threatened to impose a 25% tariff on all goods from Mexico and Canada, and an additional 10% tariff on imports from China, all part of his drive to crack down on illegal drugs and immigration.
The bank acted to slash the benchmark rate for borrowing costs in the last two rate decisions “because monetary policy no longer needs to be clearly in restrictive territory,” Governor Tiff Macklem told a news conference. “We want to see growth pick up to absorb the unused capacity in the economy and keep inflation close to 2%.”
“We discussed both options” of whether to cut by 25 or 50 basis points in light of mixed economic data since the bank’s last rate decision on Oct. 23, the governor told reporters, referring to slower-than-expected growth in the July-September GDP data that also showed a pickup in consumer spending and housing markets as well as a rise in the unemployment rate to 6.8% in November from 6.5% the previous month and 5.8% a year earlier.
Looking ahead, “with the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected,” Macklem said, suggesting upcoming rate cuts will be by 25 basis points at a time, instead of an over-sized 50-point slash.
Asked to elaborate on a “more gradual” approach, the governor told reporters that it would be “more gradual” than the two consecutive 50-basis point cuts that the bank has just conducted. “That is obviously a pretty wide zone,” he said. “That’s deliberate. We are going to take our decisions one meeting a time based on the best available information and our assessment of implications from our monetary policy.”
The BoC’s next rate announcements are scheduled for Jan. 29, March 12, April 16 and June 4, with the bank’s quarterly update on its growth and inflation outlook plus risk analysis being released in the Monetary Policy Report in January and April.
Reductions in targeted immigration levels suggest GDP growth next year will be below the bank’s October forecast of 2.1%. The effects on inflation will likely be more muted, given that lower immigration dampens both demand and supply, the governor said.
Next year the bank will launch a review of the current inflation targeting framework to be ready for 2026 when it renews its five-year accord with the government, Macklem said, adding that the bank is at its initial stage of discussing what questions should be asked to households, businesses, academics and economists. Under the existing framework, the bank targets inflation around the 2% mid-point of the 1% to 3% control range over the medium term.
Senior Deputy Governor Carolyn Rogers also told reporters that it is good timing to review the framework now because “we are coming out of the period of where we are all reminded how difficult inflation is for Canadians, so I expect perhaps unlike in the previous reviews that we’ve done in the past years, there will be more Canadians who want to participate and give their views this time around.”
Macklem will discuss this issue further in his speech to the Greater Vancouver Board of Trade on Monday, looking back at the progress made bringing inflation back to target and looking ahead to new challenges on the horizon. The bank will release his speech at 1520 EST (2020 GMT) on Dec. 16.
On whether he was worried about the weakness of the Canadian dollar, Macklem said its depreciation comes from the appreciation of the U.S. dollar against other currencies, and that its foreign exchange cross rates are stable. The bank’s policymakers will factor in the effects of a weaker Canadian dollar that boosts Canada’s export competitive edge but raises import costs.
Macklem denied that Canada is in recession since the bank has avoided generating widespread job losses in the process of raising rates to slow growth and take some steam off inflation. He also disagreed with the notion that the economy could slip into a sharp downturn next year.