Bank of Canada Cuts Rates As Expected, Ends QT, Restarts QE, And Drops Guidance On Looming Trade War
Just hours before the Fedโs dovish pause, the Bank of Canada extended its easing experiment when moments ago it cut interest rates by a quarter percentage point as expected, ended the bankโs Quantitative Tightening, and dropped guidance on any further adjustments to borrowing costs as President Trumpโs tariff threat clouds the outlook.
The central bank headed by Governor Tiff Macklem lowered the benchmark overnight rate to 3% on Wednesday. The move was widely anticipated by both markets and economists in a Bloomberg survey.
The Bank is also announcing its plan to complete the normalization of its balance sheet, ending quantitative tightening. The Bank will restart asset purchases in early March, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy
โThe economy is expected to strengthen gradually and inflation to stay close to target. However, if broad-based and significant tariffs were imposed, the resilience of Canadaโs economy would be tested,โ the bank said in its statement.
In prepared remarks, Macklem said while โmonetary policy has worked to restore price stability,โ a broad-based trade conflict would โbadly hurtโ economic activity, but that the higher cost of goods โwill put direct upward pressure on inflation.โ
โWith a single instrument โ our policy rate โ we canโt lean against weaker output and higher inflation at the same time,โ Macklem said, adding the central bank would need to โcarefully assessโ the downward pressure on inflation, and weigh that against the upward pressure on inflation from โhigher input prices and supply chain disruptions.โ
BoC officials called the 200 basis points of easing since June โsubstantial,โ and removed any guidance about further rate cuts. The smaller reduction follows to back-to-back half percentage point cuts in October and December, and was the sixth consecutive monthly rate cut.
Below we present a redline comparison of the two latest BOC statementsโฆ
โฆ and we excerpt the highlights from the latest one below:
Inflation
- โCPI inflation remains close to 2%, with some volatility due to the temporary suspension of the GST/HST on some consumer products.โ
- โShelter price inflation is still elevated but it is easing gradually, as expected.โ
- โA broad range of indicators, including surveys of inflation expectations and the distribution of price changes among components of the CPI, suggests that underlying inflation is close to 2%.โ
- โThe Bank forecasts CPI inflation will be around the 2% target over the next two years.โ
Growth
- โThe global economy is expected to continue growing by about 3% over the next two years.โ
- โGrowth in the United States has been revised up, mainly due to stronger consumption.โ
- โGrowth in the euro area is likely to be subdued as the region copes with competitiveness pressures.โ
- โIn China, recent policy actions are boosting demand and supporting near-term growth, although structural challenges remain.โ
- โCanadaโs labour market remains soft, with the unemployment rate at 6.7% in December.โ
- โJob growth has strengthened in recent months, after lagging growth in the labour force for more than a year.โ
- โThe Bank forecasts GDP growth will strengthen in 2025.โ
- โFollowing growth of 1.3% in 2024, the Bank now projects GDP will grow by 1.8% in both 2025 and 2026, somewhat higher than potential growth.โ
- โAs a result, excess supply in the economy is gradually absorbed over the projection horizon.โ
Future Policy
- โIf broad-based and significant tariffs were imposed, the resilience of Canadaโs economy would be tested.โ
- โWe will be following developments closely and assessing the implications for economic activity, inflation and monetary policy in Canada.โ
- โThe Bank is committed to maintaining price stability for Canadians.โ
- โThe next scheduled date for announcing the overnight rate target is March 12, 2025.โ
- โThe Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on April 16. 2025.โ
- โThe Bank will restart asset purchases in early March, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy.โ
- โAsset purchases will begin with the restart of the regular term repo program, followed by Government of Canada (GoC) treasury bill purchases.โ
- โThe Bank will restart its term repo program effective March 5, 2025โฆ Initially, term repo operations will range between $2bln and S5bln.โ
- โTreasury bill purchases will resume later this year and be conducted via GoC auctions.โ
- โPurchases of GoC bonds will likely not need to start until towards the end of 2026 at the earliest.โ
Other Changes
- โEffective January 30, the deposit rate will be set at a spread of 5bps below the Bankโs policy interest rate.โ
- โThis changeโฆ is being made to improve its effectivenessโ and โsupport the functioning of short-term funding markets.โ
- โAdjusting the deposit rate should also help mitigate some of the upward pressure that has been seen on the overnight rate relative to the Bankโs target rate.โ
- โEffective January 30, when they are required. ORR operations will be conducted through a uniform price auction with an aggregate cash value amountโฆ of a minimum of S8 billion and individual dealer limits for each ORR of $3 billion.โ
- Reaction at 09:55
- USD/CAD moved from 1.4440 to 1.4420 before paring the entirety of the move; initial CAD strength potentially driven by the lack of explicit signal for further easing, increasing inflation forecasts and the accompanying statement from Macklem which highlights inflation is close to target and economic activity is increasing. Points which, alongside the uncertainty around future US tariffs, indicates the BoC may be done for now with a wait-and-see approach to tariffs and any economic fallout from them.
For now, the central bank sees inflation holding close to the 2% target well into 2026 and said the upside and downside risks to price pressures were โreasonably balanced.โ Policymakers said they see evidence that rate cuts are helping to boost the economy through consumption and housing activity, and that existing excess supply would be โgradually absorbedโ over the next few years. Still, the threat of a tariff war looms large, and is โclouding the economic outlook,โ the bank said. Trump has repeatedly pledged to levy 25% tariffs as soon as this Saturday, and Canadaโs government has vowed to retaliate.
Combined, the communications suggest the central bank isnโt likely to make further adjustments to monetary policy until the specifics of Trumpโs trade policy become clearer. Absent that threat, Canadaโs economy looks increasingly headed for a soft landing.
The Bank of Canada also cut its growth forecasts for both 2025 and 2026, citing the dampening effect of government policies designed to curb population growth.
In the accompanying monetary policy report, the central bank lowered its forecast for economic growth in 2025 due to the federal governmentโs lower immigration targets. The bank now expects the economy to expand 1.8% in 2025 and 2026, down from 2.1 and 2.3% in previous projections. The central bank trimmed estimates for business investment and exports, but boosted its consumption forecast. Annual inflation in 2025 will average 2.3%, up from 2.2% in October, due to less excess supply, stronger oil prices and higher import prices resulting from the lower Canadian dollar. Inflation in 2026 is seen averaging 2.1%, up from 2.0% the bank forecast in October.
In an accompanying monetary policy report, officials also produced forecasts independent of the tariffs, but also modelled a scenario examining how a prolonged trade dispute โ in which the US and Canada impose 25% tariffs on each other โ could disrupt the northern nation.
Overall, the impact of a trade battle would be higher prices in Canada, even as the economy was substantially weakened. In that scenario, the effect of price increases from higher import costs and a weaker loonie would more than offset the drag from falling exports, business investment and demand.
Officials also announced that the central bank would end quantitative tightening on March 5, when it says it will restart asset purchases โas part of normal balance sheet management.โ Earlier this month, Deputy Governor Toni Gravelle had signaled the program would soon end.
Policymakers also made changes to deposit rate, which will now be set 5 basis points below the overnight rate as of Thursday, a move thatโs likely meant to incentivize a better flow of settlement balances or reserves across financial market participants.
The bank estimated that interest rate divergence with the Federal Reserve was responsible for about 1% of the depreciation in the Canadian dollar since October.
Macklem and Senior Deputy Governor Carolyn Rogers will speak to reporters at 10:30 a.m. Ottawa time. The governor will also do an interview with Bloomberg Wednesday afternoon.
Tyler Durden
Wed, 01/29/2025 โ 10:09
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