(Bloomberg) -- After quickly chopping interest rates down from the highest levels in two decades, the Bank of Canada is pivoting to a more gradual pace of adjustments — pushing back on expectations of a rush to cheaper borrowing costs.
On Wednesday, officials cut the benchmark overnight rate by 50 basis points to 3.25%, bringing the tally to 175 basis points of easing in a little over half a year. But in their statement, the bank removed an explicit reference that they were expecting to reduce the policy rate further, replacing that with wording that suggested they’d evaluate “the need for further reductions in the policy rate one decision at a time.”
Market reaction was swift — traders in overnight swap markets priced a higher terminal rate this cycle and bond yields rose. The loonie traded higher against the greenback, outperforming other major currencies.
“This was, in short, one of the most hawkish upsized cuts in the history of upsized rate cuts across global central banks,” Derek Holt, an economist with Bank of Nova Scotia, wrote in a report to investors.
Governor Tiff Macklem has cut interest rates faster and deeper than central banks in other advanced economies this year. With monetary policy back to less restrictive territory, he’s now signaling that more outsize cuts are likely off the table and reductions at each meeting going forward aren’t a given — rebuffing the idea that he’s rushing to stimulative borrowing costs.
After initially moving in gradual increments, policymakers launched into back-to-back 50 basis point rate cuts after yearly price pressures returned to the central bank’s 2% target — a pace of monetary easing that typically coincides with sharp downturns in the economy.
Some mistook the cuts as a signal that the central bank saw an impending recession. During deliberations for the October rate decision, the Bank of Canada’s governing council discussed worries that a larger-than-typical reduction in borrowing costs would lead investors and Canadians to anticipate additional jumbo cuts.
Speaking to reporters after the decision on Wednesday, Macklem said he doesn’t expect a recession, even as the government’s plan to reduce immigration is likely to lower growth in 2025. Donald Trump’s threats of 25% tariffs are clouding the economic outlook, and would be “very disruptive” if they came to pass, but there’s no way of knowing how that will play out, he said.
“Cutting to a 3.25% rate is still really just the central bank easing off the monetary policy brakes, and those brakes are pretty clearly not needed anymore,” Nathan Janzen, economist at Royal Bank of Canada, said by email.
The reversion to more gradual pacing may also thwart worries about further divergence from the US. Canada’s weaker growth and faster disinflation has led the bank to ease monetary policy significantly faster than the Federal Reserve, pushing the spread between the two countries’ policy rates to a 27-year high of 150 basis points.
Still, most economists saw the consecutive back-to-back half-percentage point cuts as a faster way to get where the bank knew they wanted to be, the neutral range — a theoretical level of interest rates that neither stimulates nor restricts economic growth. The central bank estimates that range to be between 2.25% and 3.25%.
“Once inflation clearly had melted away as a big risk, there was room to accelerate the pace of rate cuts because delaying that would only delay getting the economy back on its feet again,” Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce, said in an interview.
“Now you want to do a bit more fine tuning in order to figure out how much you actually need to cut rates to get the desired effect,” he said.
--With assistance from Jay Zhao-Murray.
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