Background and Impact of the Bank of Canada's Rate Cut
On Wednesday local time, the Bank of Canada announced a reduction in its key policy rate from 3.75% to 3.25%, marking the second consecutive month of a 50-basis-point cut, aligning with market expectations.
So far, the Bank of Canada has implemented five rate cuts in 2024, totaling a reduction of 175 basis points, making it one of the most aggressive among major global economies. Although this rate cut met market expectations, the bank also hinted at a potential minor rate cut in 2025, signaling a possible slowdown in monetary easing. Bank of Canada Governor Macklem stated that with such significant rate decreases, the monetary policy would take a more gradual approach, “We will assess the necessity of further reducing policy rates step by step.”
Risks and Preparations Behind the Rate Cut
This rate cut is not only aimed at stimulating economic growth but is also interpreted as the Bank of Canada preparing for potential U.S. tariff impositions by the Trump administration. Macklem clearly pointed out that President-elect Trump may impose tariffs on Canadian exports, which is a “major uncertainty” and could significantly impact the Canadian economy. He added, “If the U.S. implements promised tariffs, it will seriously disrupt the Canadian economy.” Therefore, the Bank of Canada decided to swiftly adjust policy, lower rates, and boost the economy, especially in the face of external pressures.
Market Reaction of the U.S. Dollar and Canadian Dollar
After the interest rate decision was announced, the U.S. dollar saw a brief drop against the Canadian dollar, trading at 1 USD to 1.4129 CAD. Meanwhile, the yield on Canadian two-year government bonds also dipped slightly, down about two basis points to 2.87%.
Policy Differences Between the Bank of Canada and the Federal Reserve
With the Bank of Canada's rate cut, its current rates are now 150 basis points higher than the Federal Reserve's benchmark rate. Nevertheless, the Canadian government still anticipates inflation rates will hover around the 2% target in the coming years, indicating that its monetary policy will continue to focus on the need for stable economic growth.
These consecutive rate cuts reflect the Bank of Canada’s strategy to cope with domestic economic pressures and international trade challenges. While the market widely expects further rate cuts, the bank appears well-prepared for potential external economic shocks.
