On Wednesday morning, the Bank of Canada (BoC) announced an interest rate cut of 50 basis points for their December decision — the eighth and last of the year — that brings the policy rate down to 3.25%. The last time the rate was this low was between September and October of 2022, back in the earlier days of this hike cycle.
Wednesday’s half-point cut matches what we saw of the central bank’s last meeting in October. October brought not only the largest cut of the cycle, but the largest since March 2020.
“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 BoC said in a statement released in tandem with the announcement. “Governing Council has reduced the policy rate substantially since June. Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time.”
The BoC also took the opportunity to address policy measures that will impact “the outlook for near-term growth and inflation” in Wednesday's statement. “Reductions in targeted immigration levels suggest GDP growth next year will be below the Bank’s October forecast. The effects on inflation will likely be more muted, given that lower immigration dampens both demand and supply,” it said. “Other federal and provincial policies — including a temporary suspension of the GST on some consumer products, one-time payments to individuals, and changes to mortgage rules — will affect the dynamics of demand and inflation. The Bank will look through effects that are temporary and focus on underlying trends to guide its policy decisions.”
READ: Where Every Big Bank Stands On Wednesday's Interest Rate Announcement
Economists with Canada’s ‘Big Five’ banks were largely forecasting a cut of 50 bps — with the exception of TD, where they have been sticking to their call for a quarter-point cut for months now. It’s worth noting that economists with BMO as well as Derek Holt of Scotiabank, while anticipating today would bring a half-point cut, were vocal in their belief that the BoC should go smaller. “I’d even prefer a pause,” Holt wrote in a December 16 report.
With this being the last interest rate decision of the year, experts are already placing their bets for the new year. In particular, CIBC economists are calling for the Bank to bring the policy rate down to 2.25% by mid-2025, while economists with RBC are leaning more dovish, forecasting 2% by that same time. Either way, target inflation is firmly in sight.
For Canadians, it’s been a long road to get to this point. The central bank raised the rate 10 times between March 2022 and July 2023, in what has widely been called one of the most aggressive monetary policy tightening campaigns in BoC history. In 2024, we saw three holds in January, March, and April, which left the policy rate at 5%, followed by four consecutive cuts in June, July, September, and October.
The next interest rate decision is scheduled for Wednesday, January 29, 2025. A full 2025 schedule can be found here.
