The Downward Trend Continues

The Bank of Canada made its eighth and final interest rate announcement of 2024 yesterday, finishing the year with its fifth consecutive cut. The decrease to the target overnight rate was no surprise; the question was always whether it would be 0.25% or 0.50%. After analyzing all the data, the consensus among the council was for a 0.50% cut, making this the second consecutive half-percentage-point reduction.

Announcement Date	Change	Target Rate	Prime Rate
January 24, 2024	-	5.00%	7.20%
March 6, 2024	-	5.00%	7.20%
April 10, 2024		5.00%	7.20%
June 5, 2024	0.25%	4.75%	6.95%
July 24, 2024	0.25%	4.50%	6.70%
September 4, 2024	0.25%	4.25%	6.45%
October 25, 2024	0.50%	3.75%	5.95%
December 11, 2024	0.50%	3.25%	5.45%

*Data sourced from the Bank of Canada: https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

We started the year with the prime lending rate sitting at 7.20%, the highest it had been in over twenty years. With inflation peaking at 8.10% in the summer of 2022, there was only one tool the Government had to address it: monetary policy. This is where the Bank of Canada’s target overnight rate increases came into play. As the target overnight rate increased, so did the prime rate. The idea was that by slowing borrowing, you slow spending, and by slowing spending, you bring down inflation.

The Bank of Canada’s target inflation rate is 2%. It took time for the measures to work. Rate increases began in 2022, inflation peaked in the summer of that year, and it wasn’t until this summer, 2024, that inflation fell to its target. For yesterday’s decision, the Bank cited several factors, only one of which was maintaining inflation within their target range of 1-3%.

The Bank also pointed to reduced immigration numbers expected next year, which will likely slow GDP growth and spending. Employment numbers are down, with fewer jobs being created than there are people looking for them. Additionally, there is uncertainty around U.S. policy and potential tariffs on Canadian goods. Despite these challenges, the Bank emphasized that any further cuts in 2025 would be assessed "one decision at a time" and reaffirmed its commitment to ensuring price stability for Canadians by keeping inflation in check.

The next interest rate meeting is scheduled for January 29, 2025.