| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Change | -25bp | -25bp to 0bp | -25bp | -25bp |
| Level | 2.25% | 2.25% to 2.50% | 2.25% | 2.50% |
Highlights
As was widely expected, the Bank of Canada reduced its key policy rate by 25 basis points to 2.25 percent, citing a difficult transition for the Canadian economy.
Going forward, the policy statement raised the bar for further rate cuts. If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment, it said. The central bank also stressed that the structural nature of the damage caused by the trade conflicts limits the role monetary policy can play to support growth while maintaining low inflation.
Should the outlook change, however, the BoC is prepared to respond. It projects GDP to grow 1.2 percent this year, with a weak second half as U.S. trade actions and related uncertainty are having severe effects on targeted sectors including autos, steel, aluminum, and lumber.
GDP is projected to slow down even further to 1.1 percent in 2026, before picking up to 1.6 percent in 2027. While it pointed out the sticky September inflation numbers with its own core measures around 3 percent, it estimates underlying inflation to be around 2.5 percent when considering a broader range of indicators. It expects inflationary pressures to ease, with inflation close to 2 percent over the projecting horizon.
Going forward, the policy statement raised the bar for further rate cuts. If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment, it said. The central bank also stressed that the structural nature of the damage caused by the trade conflicts limits the role monetary policy can play to support growth while maintaining low inflation.
Should the outlook change, however, the BoC is prepared to respond. It projects GDP to grow 1.2 percent this year, with a weak second half as U.S. trade actions and related uncertainty are having severe effects on targeted sectors including autos, steel, aluminum, and lumber.
GDP is projected to slow down even further to 1.1 percent in 2026, before picking up to 1.6 percent in 2027. While it pointed out the sticky September inflation numbers with its own core measures around 3 percent, it estimates underlying inflation to be around 2.5 percent when considering a broader range of indicators. It expects inflationary pressures to ease, with inflation close to 2 percent over the projecting horizon.
Market Consensus Before Announcement
Slow growth, bleak results in the bank’s latest Business Outlook Survey, and dovish comments from Governor Tiff Macklem point to another 25 basis point rate cut from the Bank of Canada.
Definition
Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.
Description
Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
