Market Wire: Bank of Canada cuts, telegraphs an end to its easing cycle

The Bank of Canada delivered another rate cut this morning, as widely expected, but clearly signalled that policy rates are now near neutral—implying that further easing is unlikely in the absence of a material shift in economic conditions.

Policymakers led by Governor Tiff Macklem lowered the policy rate by 25 basis points to 2.25 percent after cutting by the same amount in September.

In the official statement setting out the decision, policymakers highlighted growth risks as the biggest motivating factor for the move, saying “The Canadian economy faces a difficult transition. The structural damage caused by the trade conflict reduces the capacity of the economy and adds costs,” while noting that “underlying inflation” is running well within the Bank’s target range. Perhaps most critically, officials warned that if the economy doesn’t deliver major surprises, the current policy rate is “at about the right level” to keep price pressures under control while supporting growth.

Updated projections in the quarterly Monetary Policy Report show the economy taking a cumulative -1.5-percent hit from the trade war with the United States by the end of next year, with gross domestic product seen growing just 1.2 percent in 2025 before picking up to 1.4 percent in 2026 and 2027.

In remarks prepared ahead of the post-decision press conference, Governor Tiff Macklem noted that “upward momentum” in prices had dissipated, and said said “with tariffs now in place and US protectionism entrenched, the impact on Canada has become clearer, even as the level and scope of future tariffs remains uncertain. “The weakness we’re seeing in the Canadian economy is more than a cyclical downturn,” he said. “It is also a structural transition. The US trade conflict has diminished Canada’s economic prospects. The structural damage caused by tariffs is reducing our productive capacity and adding costs”. In a clear handoff to the government, he warned “monetary policy can help the economy adjust as long as inflation is well-controlled, but it cannot restore the economy to its pre-tariff path”.

The Canadian dollar is pushing higher as we go to print, suggesting that although markets were putting near-90-percent odds on a move prior to the announcement, traders were modestly wrongfooted by the Bank’s emphasis on leaving rates unchanged in the months ahead. We think this backdrop will add to the tailwinds propelling the loonie upward into next year, but still expect a brief and slight weakening before year end as US rate expectations firm.