Notes From The Desk: The BoC Rate Announcement – Go Big or Go Home
The Bank of Canada (BoC) delivered another 50 bps rate cut this morning, bringing the policy rate to 3.25%.
The rational.
- Inflation is at the 2% target, allowing the Bank to focus on supporting growth.
- 2nd half GDP has undershot the Bank’s forecast.
- The cuts to permanent and temporary immigration are expected to decrease GDP further in 2025.
- To keep growth positive, per capita GDP, which has declined for six consecutive quarters, must increase. This requires lower interest rates.
Looking ahead.
- The policy rate is now at the upper end of the estimate for the neutral rate (2.25-3.25%).
- Further cuts are likely, but the pace will be data-dependent.
- In 2025, we expect the BoC to move in 25 bps increments with the potential to skip the odd meeting or two.
Other tidbits.
- The Bank will incorporate the impact of tariffs when they are announced.
- The depreciation of the ‘loonie’ has not factored into their decision-making.
Mark reaction.
- Yields are a few bps higher as the bond market digests the implications of a slower pace of cuts next year.
- Expectations for the terminal rate to be 2.75% remain unchanged.
