Bank of Canada drops key interest rate to 3.25%, Trump tariff threat 'new source of uncertainty'

CTV National News: Bank of Canada rate cuts The Bank of Canada cut its key rate another half percentage point but warned it may be time to pump the brakes. Mike Le Couteur reports

Canada’s central bank has cut its key rate for the fifth consecutive time – now sitting at 3.25 per cent – as the country’s economy grows at a slower rate than projected.

The 50-basis-point cut comes after Canada’s economy grew by one per cent in the third quarter of 2024, and the fourth quarter is looking weaker than projected, according to the Bank of Canada.

“Monetary policy no longer needs to be clearly in restrictive territory,” said Bank of Canada governor Tiff Macklem in a statement.

Macklem noted consumer spending and housing activity both picked up as a result of lower interest rates.

Another factor in cutting the interest rate was Canada’s unemployment rate rising to 6.8 per cent in November as the bank says the number of people looking for work has increased faster than the number of jobs.

“It has been especially hard for young people and newcomers to Canada to find work,” said Macklem.

A significant shift in immigration policy by the federal government has calmed population growth in the country and some private sector economists believe that could push unemployment even higher in the months to come.

“We expect the jobless rate to push higher yet, likely averaging 7 per cent in the first quarter of next year, before receding slightly,” wrote BMO’s chief economist Douglas Porter in a recent analysis paper.

Trump's tariff threat has 'increased uncertainty'

In making its decision, the bank cited the incoming U.S. administration and Donald Trump’s threat of 25 per cent tariffs on Canadian exports to the U.S., adding it has “increased uncertainty” on its economic outlook.

“The reality is, 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,” Macklem said to reporters on Wednesday.

Asked further on the potential impact of the tariffs, Macklem said it “will have a big impact on the Canadian economy.”

“If tariffs were imposed at the levels that have been suggested, it would be very disruptive to the Canadian economy,” Macklem said.

The governor also said the central bank is reviewing monetary policy from July 2019, in which it analyzed risks of global trade policies, including a 25 per cent on all imports coming into the U.S. during Trump’s first term in office.

“Let's hope that does not happen. But what we're doing is we're doing some analysis to get prepared for that possibility. I think that's all we can do,” Macklem said.

What other factors did the central bank consider?

The central bank expects inflation to remain close to the two per cent target over the next two years as its prediction of shelter price inflation has eased, as had inflation from goods prices. However, Macklem says, “Elevated wage increases combined with weak productivity could push inflation up.”

In its decision on Wednesday, the central bank also took new federal measures into account. Last month, the federal government announced a two-month GST holiday on a long list of consumer goods.

“We expect the GST holiday to temporarily lower inflation to around one-and-a-half per cent in January,” said Macklem. “But that effect will be unwound after the GST break ends in mid-February.”

Those factors as well as proposed one-time payments of $250 for working Canadians who earned less than $150,000 last year, and changes to mortgages rules will affect the dynamics of demands and inflation according to the central bank. As a result, the bank is forecasting a more “gradual approach” to future rates decisions.

The central bank also factored in the possibility of new spending on the Canada-U.S. border, which the Liberal government could introduce next month ahead of Donald Trump’s inauguration. Trump has demanded increased security at the border to stem the flow of illegal migrants and drugs.

It’s unclear how much money the government is planning to spend, but that could be announced in the Fall Economic Statement, which is going to be presented Dec. 16 by Finance Minister Chrystia Freeland.

The Bank of Canada’s next scheduled date for announcing the overnight rate target is January 29, 2025.