The Bank of Canada has made another significant move in its monetary policy by lowering its interest rate by 50 basis points, bringing the policy rate down to 3.25% on December 11, 2024. This decision, which was a close call according to the meeting Minutes published on December 23, comes as the central bank continues its easing cycle that began in June 2024. The move is aimed at addressing economic headwinds and is part of a broader strategy that has seen a cumulative reduction of 175 basis points throughout the year.
The decision to cut rates was not unanimous among the council members, with some advocating for a smaller reduction of 25 basis points. This internal debate highlights the challenges faced by the Bank of Canada as it navigates a complex economic landscape. Governor Tiff Macklem has indicated that future rate cuts are likely to be more gradual, signaling a shift from the earlier approach of steady easing.
November's economic indicators have presented a mixed picture. The core Consumer Price Index (CPI) showed a slight contraction of 0.1% compared to the previous month but registered a 1.6% increase from the same period last year. Analysts at TD Securities predict that the CPI will edge higher to 2.0% year-over-year as prices are expected to fall by 0.2% on a monthly basis.
"We look for CPI to edge higher to 2.0% YoY as prices fall by 0.2% MoM. Seasonal headwinds to core goods will weigh heavily on a MoM basis, while food prices and a softer Loonie provide a source of strength. Core inflation should slow by 0.2pp to 2.45% YoY on average as CPI-trim/median overshoot BoC projections for Q4, but we expect the BoC to look through this in January."
– Analysts at TD Securities
The Canadian Consumer Price Index is anticipated to advance by 1.8% year-over-year in December, reflecting ongoing inflationary pressures. November's headline inflation rose by just 1.9% annually and was flat on a monthly basis, underscoring the challenges in achieving stable economic growth.
In the foreign exchange market, the USD/CAD pair has been navigating a consolidative range since mid-December, reaching multi-year highs beyond the 1.4500 mark. The currency pair has been influenced by risk aversion and increased demand for the US Dollar, partly driven by US President Donald Trump's tariff threats.
"I have the best words"
– Donald Trump
This quote from President Trump underscores how his words can significantly impact market dynamics, often more so than economic data itself.
Key technical levels such as the November low of 1.3823 (November 6) and the 200-day Simple Moving Average (SMA) at 1.3816 are crucial support points for USD/CAD traders. These levels are closely monitored as they provide insight into potential market movements.
The Bank of Canada's recent actions reflect its attempt to steer the economy through uncertain times. While core inflation is expected to slow slightly, the central bank is likely to overlook this in its January assessment as it continues to focus on long-term economic stability.