The Bank of Canada just slashed rates by 50bps (to 3.25%) - as expected - and the second 50bps cut in a row as the central bank claimed growth looks weaker than expected... but they were careful to tamp down any exuberance over future cuts.

The bank said it cut by 50 basis points to “support growth and keep inflation close to the middle of the 1-3% target range,” citing inflation near 2%, excess supply, and softer-than-expected growth.

The decision was expected by markets and most economists in a Bloomberg survey.

Slightly hawkish shift in language...

The central bank said it will be “evaluating the need for further reductions in the policy rate one decision at a time.”

By comparison, October’s policy statement said that “if the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further.”

Who's to blame for the slower growth? Trump and Immigration...

Donald Trump’s threat to impose 25% tariffs on Canadian exports to the US has “increased uncertainty and clouded the economic outlook,” the bank said.

“No one knows how this will play out in the months ahead — whether tariffs will be imposed, whether exemptions get agreed, or whether retaliatory measures will be put in place,” Governor Tiff Macklem said.

Lower immigration targets mean GDP growth next year will likely be weaker than forecast in October, the bank said.

Inflation impacts will likely be muted as lower immigration reduces both demand and supply.

Additionally, the bank mentioned other government policies and said it won’t react to temporary effects, placing more emphasis on underlying trends in inflation. A temporary sales tax holiday will lower inflation to around 1.5% in January, but the effect should be unwound after mid-February.

BoC's Macklem says:

"Monetary policy no longer needs to be clearly in restrictive territory"; previous "cuts will be working their way through the economy"

"Economy remains in excess supply and the growth outlook now appears softer than we projected in October".

"We will be looking at measures of core inflation to help us assess the trend in CPI inflation."

"We expect the GST [tax] holiday to temporarily lower inflation to around VA% in January, but that effect will be unwound after the GST break ends in mid- February."

"The economic outlook is clouded by the possibility of new tariffs on Canadian exports to the United States."

"Our policy focus now is to keep inflation dose to target."

"We want to see growth pick up to absorb the unused capacity in the economy and keep inflation dose to 2%."

"We thought elevated shelter price inflation would continue to ease, and it has."

The Loonie strengthened on the BoC's move

Source: Bloomberg

Canadian stocks advanced, while bonds pared gains after BoC rate cut.

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