The Bank of Canada lowered its interest rate by another 50 basis points to 3.25% on Wednesday but signalled it will continue to cut rates at a slower pace.
The move was in line with economists’ expectations and marked the fifth consecutive rate cut since June.
The central bank noted that the Canadian economy grew by 1% in the third quarter, below its October projection, and the fourth quarter is also looking weaker than projected.
Business investment, inventories and exports weighed on growth while consumer spending and housing activity both ticked up.
The bank also noted that the possibility the incoming Trump administration in the US could impose new tariffs on Canadian exports has “increased uncertainty and clouded the economic outlook.”
At a press conference following the rate decision, Bank of Canada governor Tiff Macklem was asked about President-elect Donald Trump’s plan to introduce a 25% tariff on Canadian exports.
He said these proposed tariffs would be “very disruptive” to Canada’s economy. "The threat of new tariffs on Canadian exports, particularly at the level that's been suggested, that is a major new source of uncertainty,” Macklem said.
Analysts at Wells Fargo viewed the announcement reflecting some front-loading of the Bank of Canada’s monetary easing plans.
“With headline inflation at the 2% target and core inflation running only modestly faster, the central bank has flexibility to lower interest rates further, while its guidance suggests those rate cuts will come in smaller 25 bps increments,” analysts wrote.
They expect it to cut its policy rates by 25 basis points in January, March and April which would see it reach a low of 2.5% in the second quarter, earlier than expected.
“The risks are tilted toward further easing, especially if Canadian growth is weaker than expected or US tariff policy is more aggressive than expected,” they wrote.
“We also view sluggish economic growth and ongoing Bank of Canada easing as consistent with a weaker Canadian dollar over the medium term.”