December 2024: Bank of Canada announces another super-sized interest rate cut

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It’s a Christmas Gift! As of Dec 11th 2024, Canada’s prime lending rate is now 5.45%! That’s a 50 basis point drop!
Canadian Economic Performance and Housing Market Update The Bank of Canada decided to cut its key interest rate by 50bps for the second time in a row during this meeting, just like the markets expected. This brings the total rate cuts from this cycle to 175bps, down from the peak of 5%. However, central bank officials made it clear that they’re not planning any aggressive rate cuts next year. They even removed the statement about further rate reductions if their base case plays out. The decision to cut rates came after data showed that Canada’s GDP grew by just 1% in the third quarter, falling short of the Bank’s expectations. The fourth quarter is also looking like it could miss forecasts. On the plus side, there’s good news in consumer spending, which is higher than expected—indicating that the lower interest rates are starting to give households a bit of a boost.

When it comes to jobs, the unemployment rate rose to 6.8% in November, as employment growth didn’t quite keep up with the growing labor force. While wage growth has started to slow down a bit, it’s still outpacing productivity.
 As for inflation, the Bank of Canada expects it to stay close to the 2% target over the next couple of years. However, there’s some uncertainty around price growth, especially with potential tariffs from the upcoming US presidential administration.
 Looking at the broader picture, Canada’s economy grew by 1% in the third quarter, which was a bit lower than what the Bank of Canada had projected in October. The fourth quarter isn’t looking much better either. The slower growth in Q3 was mainly due to lower business investment, a drop in exports, and a slowdown in inventory builds.
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Bond yields have already bounced back up after dropping earlier this morning. The market is reacting to US inflation data, which came in right on target, and that’s pushing 10-year US Treasury yields higher.
 Another reason bond yields are climbing is that the Bank of Canada has signaled there may not be any more “jumbo cuts” for now. Instead, we could see a slower pace of rate cuts. A big factor behind this shift is the incoming US president, who is adding uncertainty to the economic outlook. With consumer spending stronger than expected and tariff concerns for 2025 under the new administration, the Bank of Canada is rethinking its approach to rate cuts. 

Canadian Consumer Spending

The population if growing at a 3.2% pace, yet consumer spending grew 2.4%.  Keep in mind that service inflation is 3.6% in Canada as Canadians focus their spending on experiences and not necessarily products. https://tradingeconomics.com/canada/consumer-spending 

The Fed is meeting on the 18th and that meeting will be important, plus the Fed’s speech on their future outlook on rates and the economy. 

Canadian Inflation and Outlook

Inflation, as measured by the Consumer Price Index (CPI), has been hovering around the 2% mark since the summer and is expected to stay close to this target over the next couple of years. Since October, inflation pressures from housing have eased, while the downward push from goods prices has also moderated as expected.Looking ahead, the upcoming GST holiday is expected to temporarily lower inflation, but once that break is over, inflation will likely return to normal levels. To get a clearer picture of inflation trends, the Bank will continue to monitor core inflation measures. 

US Inflation

The CPI in the US increased 0.3% month-over-month in November 2024, the most since April, slightly above October’s 0.2% and in line with market expectations. The index for shelter rose 0.3% (vs 0.4% in October), accounting for nearly forty percent of the monthly all items increase. source: U.S. Bureau of Labor Statistics

Global Economic Performance and the Canadian Dollar

The global economy is pretty much on track with the Bank’s October projections. The US economy is still going strong, with robust consumer spending and a healthy labor market. US inflation has remained steady, with some price pressures lingering.In the euro area, growth indicators are showing signs of weakness, while China’s growth is being supported by strong exports and recent policy actions, though household spending there is still low.Global financial conditions have eased, but the Canadian dollar has depreciated, largely due to the US dollar’s strength across the globe.

The Bank of Canada explained today’s decision to cut the policy rate by 50 basis points by pointing out that with inflation around 2%, the economy operating above potential, and recent indicators suggesting softer growth than expected, this rate reduction should help support growth and keep inflation within the Bank’s 1-3% target range.

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Want to see previous interest rate announcements from 2024?
Want to see when the announcements are in 2025?
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