Bank of Canada Cut Interest Rates by Another 50 Basis Points

The Bank of Canada (BoC) issued another supersized 50 basis point (bps) rate cut on Wednesday, bringing the overnight rate down to 3.25 per cent. It’s the BoC’s final policy rate decision¹ of the year and adds to a 50 bps cut in October, bringing the total cuts to 125 bps since June.

While the BoC may not be completely through with cuts, there are no additional supersized cuts on the horizon, explains Clair Fan, an Economist at RBC. As BoC Governor Tiff Macklem’s opening statement makes clear, interest rates are no longer in restrictive territory, which will allow the central bank to take “a more gradual approach” to monetary policy adjustments moving forward.

The cut comes after several economic indicators have been pointing to weaker growth. For instance, Canada’s unemployment rate topped 6.8 per cent in November, its highest level since January 2017 (not including the pandemic highs), an increase from 6.5 per cent in October, according to Statistics Canada. Canada’s gross domestic product (GDP) grew at an annualized rate of 1 per cent² in the third quarter, which was broadly in line with expectations but softer than the BoC’s latest 1.5 per cent forecast. Per-capita GDP fell for a 6th consecutive quarter and in eight out of the last nine readings. The Canadian dollar has also been slipping against a stronger U.S. currency recently, trading at its lowest level in more than four years.

The central bank is cutting rates to try to spur economic activity without sending the economy into overdrive. According to RBC Economics, the 50-bps cut is at the top of the 2.25 per cent to 3.25 per cent range that the BoC views as “neutral” and still well above the 1.75 per cent peak in the decade before the pandemic came along in 2020.³ “Additional interest rate cuts so far have been the equivalent of the BoC easing off the economy’s brakes rather than stepping on the gas,” wrote RBC Economics in its recent pre-rate announcement report.

What a BoC cut means for investors

Rate cuts can have several implications for investors. For instance, stock markets might rise after a cut because the market may anticipate better earnings for companies in the months ahead. Why? Because cheaper borrowing, such as on a line of credit or a mortgage, tends to lead to increased spending from consumers and businesses, which ultimately boosts earnings and, eventually, stock prices. Fixed-income investors may also benefit if bond yields decline, as falling yields lead to higher bond prices. It’s worth pointing out, though, that past performance of stocks and bonds is never a guarantee of future returns. Other factors, such as company and industry news, investor sentiment and economic events, also have an impact.

Where rates go from here

While the BoC’s policy rate has fallen to 3.25 per cent from 5 per cent in less than a year, RBC Economics expects additional rate cuts will be needed in 2025 to drive economic growth and prevent Canada from falling into a recession. “We continue to expect that additional interest rate cuts will be needed in the year ahead with the overnight rate ultimately falling below the BoC’s estimate of the neutral range at 2 per cent in mid-2025,” noted RBC in its report.  

1. Source: Bank of Canada, "Policy interest rate", 2024

2. Source: RBC Economics, "Canadian GDP Update" November 2024

3. Source: RBC Economics, "Forward Guidance: Our Weekly Preview", December 2024