On December 11, the Bank of Canada (BoC) held its eighth policy meeting of 2024 to outline its policy direction and set the overnight target rate. The principal question was whether the central bank would implement another ‘jumbo’ 50 basis point (bp) cut or scale back to a more conventional 25 bp reduction. Amid conflicting economic datapoints leading up to today’s announcement, the BoC’s opted for the larger cut, lowering the key policy rate to 3.25%.
With the analyst community initially forecasting greater odds of a 25 bp cut following the October meeting, the probability of a larger cut grew as sluggish GDP growth and persistently rising employment emerged in recent data. Ultimately, these factors appear to have prompted today’s more aggressive approach.
At the October meeting, the BoC leaned heavily on September’s Consumer Price Index (CPI) data, which had dropped to its lowest level since February 2021. In contrast, November CPI data showed a strong rebound, rising from 1.6% to 2.0% in October and surpassing the consensus estimate of 1.9%. This raised concerns that inflationary pressures may persist and bolstered sentiment favouring a smaller rate cut.
These concerns mounted further when on November 21, StatsCan reported Producer Price Inflation (PPI) rose by 1.2% month-over-month, surpassing market expectations of a 0.3% increase and rebounding from a revised 0.8% decline in September. This marked the strongest monthly growth since April. The PPI measures a month-over-month change in the price of goods and services sold by manufacturers and producers in the wholesale market and is sometimes considered a precursor of future consumer price trends.
However, sentiment favouring a larger cut increasingly gained traction as Q3 GDP growth came in at 1% cent annualized in November, falling short of the BoC’s 1.5% forecast. Despite the modest gain, the report signaled GDP per capita declining for six consecutive quarters. At the time, the data pushed rate hike odds from 25% to 33%, as traders viewed it as a bullish signal for the BoC to pursue a more aggressive cut.
Among the final datapoints playing an important role in today’s BoC decision were unemployment numbers for November. With the unemployment rate trending up and rising 1.7 percentage points since April 2023, a stable number could have provided confidence that economic activity was gaining momentum. However, this was not the case.
On December 6, StatsCan reported that the unemployment rate rose to 6.8% from 6.5% in October — two percentage points above the median consensus forecast of 6.6%. Furthermore, of the 51,000 jobs added by the economy in November, 45,000 of those new jobs (88.23%) came from the public sector. This signaled that private sector job growth remains sluggish and below the economy’s potential, providing ample justification for today’s strong action.
Looking ahead to the BoC’s next interest rate announcement and Monetary Policy Report set for January 29, 2025, we believe new U.S. administration tariff policies could emerge as a significant factor influencing next month’s rate decision. With the administration seeking to impose unusually high tariffs on Canadian imports, such action (or inaction) could prompt the BoC to respond accordingly.
The impact of an additional rate cut on Canadian mortgage holders
The BoC’s overnight lending rate serves as a benchmark that financial institutions use to determine interest rates for various financial products. While rate cuts have a direct impact on variable-rate mortgages as lenders adjust their prime rate in proportion to the cut, fixed-rate mortgages benefit indirectly as longer-duration bond yields tend to front-run expectations of shorter-duration yields over time.
The following chart illustrates that since the Bank of Canada began its rate-cutting cycle on June 5, 5-year variable mortgage rates at TD Bank (pink line) have decreased by approximately 136 bp (as of November 25, 2024). In comparison, the reduction in 5-year fixed mortgage rates (blue line) has been less pronounced, declining by 31 bp. However, fixed rates have generally trended lower and maintained their gains. This latest BoC rate cut is likely to reinforce this downward trend.
Today’s announcement will provide immediate relief for variable-rate mortgage holders, who according to the 2024 CMHC made up 69% of all mortgages contracted in 2024. With 46% of all homebuyers purchasing at the maximum price they could afford and 35% exceeding their planned budget, the inference is that household finances remain tightly constrained.
Meanwhile, existing homeowners with fixed-rate mortgages do not benefit directly as their rate and term are locked in at the time of closing. However, new borrowers and existing homeowners approaching renewal may benefit from a lowering rate profile. This could translate into reduced monthly payments, improved affordability, or an opportunity to pay down their principal more quickly, easing the financial burden on the new mortgagee.
Either way, a reduction in the policy rate can substantially lower the financial burden on all consumer debt, improving the debtor’s ability to meet its payment obligations.
Bank of Canada remains cautiously optimistic on economic outlook
At the post-policy rate announcement press conference, BoC Governor Tiff Macklem outlined its strategy for navigating the Canadian economy amidst evolving economic conditions. As expected, economic growth and inflation were key areas of focus, with Macklem addressing both in the context of the Canadian economy.
On the interest rate front, Governor Macklem emphasized that “lower interest rates are beginning to pass through to stronger spending,”
consistent with the lag effect generally seen at the beginning of a rate cutting cycle. With rate cuts beginning to exert their intended effects, this should support stronger consumer spending growth trends throughout 2025.
Alternatively, Governor Macklem acknowledged overall economic growth was slower than expected in Q3 2024 and was likely to be slower in the current quarter. He further signaled that the job market was softening—particularly among new Canadians and young people. With reduced immigration targets expected through 2026, the BoC forecasts this will have a dampening effect on the Canadian economy relative to the recent norm.
Meanwhile, the Bank of Canada offered encouraging updates on inflation, with Governor Macklem stating, “The downward pressure on inflation from goods prices has also moderated as predicted.”
He further predicted that a temporary GST holiday is expected to further reduce inflation to 1.5% in January. If this forecast holds, the January 2025 CPI reading would mark the lowest level since September 2020 (common CPI).
Further risks to the BoC’s inflation projection include elevated wage growth and weak productivity, which could serve to pull inflation higher. Alternatively, slower economic growth could serve to pull inflation down, which would give the BoC more room to cut rates in 2025.
Of note, Governor Macklem addressed the issue of impending tariffs on Canadian exports for the first time, describing it as “clouded by the possibility of new tariffs”
pending the new U.S. administration’s stated intentions. However, Macklem also acknowledged that, “no one knows how this will play out in the months ahead,”
suggesting the BoC is taking a wait-and-see approach before incorporating these potential impacts in their economic outlook.
We expect greater clarity on tariff impact at the next BoC policy interest rate meeting on January 29, following the U.S. presidential inauguration on January 20, 2025.
About Skyline Group of Companies
Skyline Group of Companies (“Skyline”) is a fully integrated asset acquisition, management, development, and investment entity.
It is comprised of companies that provide services in real estate management and development, as well as clean energy management and development.
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