In its December meeting, the Bank of Canada (BoC) announced a 50 basis points (bps) cut to its key interest rate, marking the second consecutive reduction. This decision was in line with market expectations, bringing the total cumulative rate cuts from the peak of 5% in this cycle to 175bps. Despite this sharp cut, BoC officials indicated that aggressive rate cuts will likely not continue into the next year. The central bank also removed the statement suggesting further rate cuts would be necessary if their base case scenario holds, signaling a more cautious approach moving forward.

Economic Data and Central Bank’s Rhetoric

The interest rate cut followed disappointing data showing that Canada’s GDP grew by only 1% on an annualized basis in the third quarter, below the BoC’s earlier projections. There are also concerns that growth in the fourth quarter could miss forecasts, further dampening economic optimism. However, some positive news came from consumer spending, which has been stronger than expected. This indicates that while the economy faces challenges, some sectors remain resilient.

Inflation and Future Outlook

Looking ahead, the Bank of Canada noted that inflation is expected to stay near the 2% target over the next couple of years, providing some stability for the Canadian economy. However, the BoC also pointed out potential risks to price growth, including the uncertainty of potential tariffs from the upcoming US presidential administration. These external factors could have an impact on inflation and complicate future monetary policy decisions.

Conclusion: A Cautious Path Forward

While the Bank of Canada’s decision to lower interest rates for the second time in a row signals an ongoing effort to support the economy, the central bank’s cautious rhetoric suggests that it does not foresee any more aggressive rate cuts in the near future. The BoC will continue to monitor economic data and external risks, such as US tariffs, as it navigates the balance between stimulating growth and keeping inflation in check.