Bank of Canada Makes Supersized Cut, Fears Immigration Shift Will Slow GDP

Canada’s central bank announced another “supersized” rate cut this morning, as widely expected by the market. The Bank of Canada (BoC) overnight policy rate was slashed to 3.25% after being trimmed by a 50 basis points (bps) drop. This marked the fifth consecutive cut to the rate, and the second supersized cut—a move typically only reserved for economically devastating emergencies. They see weaker-than-anticipated GDP growth slowing even more with recent policy changes. Going forward the central bank warned that rates are unlikely to continue falling at such a rapid pace, if they fall at all. 

BOC Sees A Slow Economy Getting Slower With Immigration Cuts

A weak Canadian economy is set to become even weaker in the coming months. The BoC noted that annualized GDP only advanced 1% in Q3, slower than they had forecast. A problem they see getting worse with weak Q4 data and recent policy announcements expected to provide a further drag.  

“The most significant of these [slowing economic factors] is reduced immigration targets, which suggest GDP growth next year will be lower than we forecast in October,” warned BoC Governor Tiff Macklem.  

Adding, “The effects of lower population growth on the inflation outlook will likely be more muted because reduced immigration dampens both demand and supply in the economy.” 

In plain english, the impact of immigration changes may have a mixed impact. Canada was using immigration as a form of economic stimulus, only paying attention to the resulting aggregate growth from adding more people. While GDP was boosted, per-capita growth fell—especially since the excess demand boosted inflation for necessities. As immigration pulls back, the boost to aggregate GDP will fade, but the potential for inflation to slow also remains—as long as flooding the market with cheaper credit doesn’t boost demand too much. 

Considering the BoC’s only mandate is inflation, it was a relatively small concern in their forecast. The policy rate is within the central bank’s 1 point margin of their target rate of 2%. Last month’s data also showed the BoC-preferred CPI Core climbed 0.2 points to 2.5% in October. The central bank also previously noted the deceleration observed in recent months is largely due to a transitory base effect on gasoline, which will fade. Though this time around, the central bank only warned that upside risks remain, attributing it to elevated wage growth against weak productivity.  

Risks of deflation from a significant output gap were also a concern of the central bank. Recent GDP revisions should have technically closed that output gap, implying they did not acknowledge the revisions. 

Bank of Canada To Make Rate Decisions More Slowly Going Forward

The central bank signaled its mad dash to lower rates may be coming to an end. Over the past 7 months the overnight rate has seen 1.75 points cut, a pace not seen since the Great Recession. In fact, nothing like this has even been observed outside of a serious recession in Canada. Considering the narrative is the economy is slow but not doing that poorly, it’s no surprise the central bank sees a slower pace for rate cuts going forward.  

“…with the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected… Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time,” explained the Governor.  

We’ll gloss over the fact that implies the most recent rate cut wasn’t data dependent. Anyway, aren’t vibes the most important indicator in this economy?