The G7 pioneer, the Bank of Canada, cut interest rates by 50 basis points, in line with expectations, with slightly hawkish language regarding future rate cuts

On Wednesday, December 11, the Bank of Canada cut interest rates by 50 basis points to 3.25%, in line with expectations. This marks the fifth consecutive rate cut by the Bank of Canada.

In June of this year, Canada began its easing cycle, cutting rates by 25 basis points; in the subsequent meetings in July and September, rates were also cut by 25 basis points each time; in the October meeting, the pace of rate cuts accelerated, with a 50 basis point reduction, the same as in this meeting.

Canada is a pioneer in this round of monetary easing, being the first G7 country to cut rates. After the Bank of Canada cut rates in June, the European Central Bank and the Federal Reserve also joined the rate-cutting trend.

The Bank of Canada recently stated that the country's economic growth appears weaker than expected, with inflation close to 2% and an oversupply situation. The 50 basis point cut is aimed at supporting economic growth and keeping the inflation rate at the midpoint of the 1%-3% target range.

However, the Bank of Canada is cautiously tempering market excitement about future rate cuts, with slightly hawkish wording. The central bank stated that it will assess the necessity of further lowering the policy interest rate on a case-by-case basis. In contrast, the policy statement from October indicated that if economic developments were broadly in line with our latest forecasts, further reductions in the policy interest rate were expected.

The Bank of Canada stated that U.S. President-elect Donald Trump's threat to impose a 25% tariff on Canadian exports to the U.S. adds uncertainty, casting a shadow over Canada's economic outlook. Bank of Canada Governor Tiff Macklem stated that no one knows how things will develop in the coming months, whether tariffs will be imposed, whether an exemption agreement will be reached, or whether retaliatory measures will be implemented.

When discussing immigration policy, the Bank of Canada indicated that lowering immigration targets means that Canada's GDP growth next year may be below the forecasts made in October. The reduction in immigration is expected to limit demand and supply, with limited effects on inflation.

Additionally, the Bank of Canada mentioned other government policies and stated that it would not react to short-term effects but would focus more on the underlying trends in inflation. A temporary sales tax holiday is expected to temporarily lower inflation to about 1.5% in January, but this effect will fade after mid-February.

Key points from Governor Macklem's speech are as follows:

Monetary policy no longer needs to be significantly tight. Previous rate cuts are gradually taking effect on the economy.

The Canadian economy remains in a state of oversupply, and the growth outlook now appears weaker than our October forecast. The uncertainty surrounding the Canadian economic outlook also includes the possibility of new tariffs on Canadian exports by the U.S.

We hope for a rebound in economic growth to absorb the excess capacity in the economy while keeping inflation around 2%. Our current policy focus is on maintaining inflation near the target level.

We will monitor core inflation indicators to help assess the trend of CPI inflation. The sales tax (GST) holiday is expected to temporarily lower inflation to about 1.5% in January, but this effect will fade after the GST holiday ends in mid-February We believe that the high inflation of housing prices will continue to ease, and in fact, it is indeed the case.

After the Bank of Canada announced an interest rate cut, the two-year Canadian government bond yield rebounded in the short term, and the USD/CAD fell from 1.419 to 1.416, while the Canadian stock market rose. The Governor of the Bank of Canada announced the abandonment of restrictive monetary policy requirements, and when discussing the threat of Trump tariffs, the Canadian dollar rose, leading to a sharp V-shaped trend in government bond yields.