The Bank of Canada cut its policy rate by 50 basis points to 3.25 per cent, a move widely expected by economists and markets.

The decision marks the fifth consecutive cut by the central bank this year and the second half-point cut in a row to the overnight rate. The last times the bank made two consecutive half-point cuts were at outset of the pandemic in 2020 and during the 2008 financial crisis. The overnight rate now sits at the top of the central bank’s neutral range.

“With inflation back to target, we have cut the policy rate by 50 basis points at each of the last two decisions because monetary policy no longer needs to be clearly in restrictive territory,” said

Bank of Canada Governor Tiff Macklem, during prepared remarks in Ottawa. “We want to see growth pick up to absorb the unused capacity in the economy to keep inflation close to two per cent.”

Bank of Montreal chief economist Douglas Porter noted the Bank of Canada has now cut by 175 basis points this year.

“The bank thus retains the crown of most aggressive rate-cutter in the world (no other G10 central bank has cut by more than 125 basis points and the Fed is at 75 basis points so far),” he said, in a note to clients.

The central bank acknowledged growth in the second half of 2024 is expected to be slower than forecast. Growth in the third quarter came in at one per cent, below the bank’s forecast of 1.5 per cent, and early estimates for the fourth quarter are expected to come in softer than anticipated. In addition, the jobless rate hit 6.8 per cent in November, as the number of jobs grew more slowly than the labour force.

Macklem also pointed to recent developments that might affect the growth outlook.

“A number of policy measures have been announced that will affect the outlook for growth and inflation in the months of ahead,” he said. “The most significant of these is the (federal government’s) reduced immigration targets, which suggest GDP growth next year will be lower than we forecast in October.”

The two-month GST/HST holiday recently announced by the federal government is also expected to distort inflation. The central bank expects the measure will temporarily lower inflation to around 1.5 per cent in January, but the impact will unwind after the break ends in mid-February.

However, the source of greatest uncertainty is a potential 25-per-cent tariff on all Canadian exports by incoming U.S. president Donald Trump, who takes office in January.

“No one knows how this will play out in the months ahead — whether tariffs will be imposed, whether exemptions get agreed, or whether retaliatory measures will be put in place,” Macklem said. “This is major new uncertainty.”

Canadian Imperial Bank of Commerce chief economist Avery Shenfeld thinks the uncertainty around tariffs in combination with an economy growing below its potential will require further cuts to the policy rate.

“Our estimate of the neutral rate sits at 2.75 per cent, the midpoint of the bank’s estimated range, and we see the overnight rate getting to 2.25 per cent on a series of quarter-point cuts ahead,” Shenfeld said.