Canada’s central bank slashed its key interest rate, as widely expected—but went even further. Earlier today, the Bank of Canada (BoC) announced it would slash the overnight rate by 25 basis points (bps), as well as end its quantitative tightening (QT) program pre-maturely. The central bank has been amongst the fastest easing in the world, and the stimulus is sending a clear warning sign—Canada won’t be able to keep up with global growth. That’s before the added risks of tariffs enter the picture.
Canadian Economy To Significantly Fall Behind Global Growth
Canada’s weak economy is among the biggest issues contributing to monetary easing. Rising unemployment and “excess supply” are often debated points, but being left significantly behind global growth is a much bigger one. The BoC currently sees global GDP rising 3% on average per year, for the next two years. Meanwhile, in Canada, expectations have been cut down to an average of 1.8% over the same period. That cuts roughly a fifth of the central bank’s forecast made just a few months prior.
Bank of Canada Fails To Acknowledge Rising Core Inflation
The central bank seemed dismissive of inflation data, despite that being its primary objective with rates. “While we expect some volatility in CPI inflation due to temporary tax measures, our forecast is that inflation will remain close to the 2% target over the next two years,” said the BoC during prepared remarks with the rate announcement.
“There was really no mention of the upward drift in core inflation in recent months, which is a bit surprising,” wrote Douglas Porter, chief economist at BMO.
Porter is referencing the GST/HST holiday that temporarily suppresses inflation. Note that’s temporary—it doesn’t remove it, since it will come back with a vengeance once the temporary tax breaks subside. The central bank didn’t acknowledge the rise; instead, it deferred to the results of a survey on expectations. Um, sure.
Canadian Dollar Plunges, The BoC Finally Takes Note
Shortly after the announcement was made, the loonie experienced further value erosion. The US dollar traded as high as US$1.448 against the loonie in intraday trading. That marks one of the weakest levels in the past 20 years, complicating inflation expectations since commodities are priced in US dollars. The BoC acknowledged this issue finally, though carefully framed the timeline to dismiss its role in setting expectations on the loonie.
“The Canadian dollar has depreciated materially against the US dollar, largely reflecting trade uncertainty and broader strength in the US currency,” warned the BoC in its speech.
BMO felt this may indicate a turning point in how the central bank approaches its policy. “This was really the first indication that the Bank is noting the downswing in the currency, and Macklem indicated during the press conference that a deeper drop would (finally) need to be taken into account in setting policy,” explained Porter.
A dive into the accompanying Monetary Policy Report (MPR) shows the BoC was less willing to acknowledge its role. The central bank attributes recent erosion of the loonie to a currency exchange premium directly related to the US electing new leadership in November. However, they failed to scroll just a tiny bit back and explain how the USD went from C$1.20 to C$1.38 from the bottom of June 2021 to the peak in August 2024. But sure, the C$0.06 gained were likely related to the tariff war uncertainty.
Canada’s Calm Before The Tariff Storm?
Tariff uncertainty played a big role in the BoC’s outlook. The central bank warns a broad tariff would trim 2.5 points of GDP in the first year alone. US policymakers have emphasized that broad tariffs will only apply if the two countries can’t agree on border measures. It appears it may not be as simple as it sounds from the rhetoric on “striking” back with retaliation. Even a partial escalation of new tariffs would be a drag on growth, though potential political turbulence should be out of scope for monetary policymakers.
“Next steps clearly are dependent on what unfolds on the trade front; we suspect while the Bank may initially respond cautiously to a trade war, eventually it would be compelled to cut much more than the market currently expects,” writes Porter.