The Bank of Canada has cut its key interest rate by 50 basis points to 3.25%, marking the fifth consecutive rate cut since June.
In November, unemployment reached 6.8%, a higher rate than expected, forcing the government to take action to stimulate economic growth.
With this move, the central bank hopes to boost consumer spending and housing activity, which have shown signs of improvement.
However, the rate cut also comes with potential risks.
The Bank of Canada emphasised the uncertainty surrounding any new tariffs imposed by the incoming U.S. administration on Canadian exports. The economy may be disrupted as a result.
Despite the central bank's current focus on keeping inflation at its 2% target, tariffs remain a significant source of uncertainty, according to governor Tiff Macklem.
As a result of the rate cut, borrowing will be cheaper and home sales may increase.
If the housing market overheats, economists warn that this could also lead to higher inflation.
Additionally, lower interest rates could further weaken the Canadian dollar, affecting import costs and potentially leading to higher prices for consumers.
Overall, while the rate cut supports economic growth, it also introduces new challenges and uncertainties.
The Bank of Canada will need to carefully monitor the economic impact of its decision. It will also need to be prepared to adjust its policy as required to maintain stability.
