The Bank of Canada’s governing council expects its second straight outsized interest rate cut helped it turn a corner in its fight to tame inflation, but it is watching the economy closely amid weaker than expected growth.
The central bank’s summary of deliberations released Monday offers a glimpse into the council’s discussions in the lead up to the Dec. 11 rate cut, which lowered its key interest rate by half a percentage point.
Members considered only cutting by a quarter-point, but ultimately brought the rate down to 3.25 percent in a bid to bring it closer to its so called neutral rate, where it is neither slowing nor speeding up economic growth.
“First, with inflation at two percent and the economy in excess supply, monetary policy no longer needed to be clearly restrictive,” the summary said.
“Second, the outlook for growth was lower than expected in October, and stronger growth was needed to take up the slack in the economy and keep inflation close to the two percent target.”
The council members also discussed recent changes to Canada’s immigration targets, noting the planned reductions in immigration will translate into lower GDP growth than the bank had forecast back in October.
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The government had targeted bringing in 500,000 new permanent residents in both 2025 and 2026. Next year’s target will instead be 395,000 new permanent residents, and that will fall to 380,000 in 2026 and 365,000 in 2027.
“Members agreed that further analysis would be needed to assess the likely timing of the demand and supply effects of new immigration targets as part of the preparation of the updated forecast in January,” the summary said.
They also noted the tariff threats from incoming U.S. president Donald Trump are a “major new source of uncertainty” for the Canadian economy.
“The impact on economic activity and inflation would depend on several factors, including the scope and size of the tariffs and any retaliatory measures that are taken, all of which are impossible to predict,” the summary read.
“Members acknowledged that the increased uncertainty could already be affecting the outlook, particularly for business investment, but it was not possible to assess the broader implications without more information.”
Council members also said they’d be considering further rate cuts, but would be taking a more gradual approach given the five consecutive cuts since June, and giving the economy time to respond to them.
“There was a range of views on how much further the policy rate would need to be reduced, and over what period that should happen,” the summary said.
The next rate decision and quarterly economic forecast are scheduled for Jan. 29.
