The Bank of Canada has cut its key interest rate by another 50 basis points to 3.25 per cent.
It is the fifth consecutive cut to the overnight interest rate since early June.
Before that, the interest rate had held steady at five per cent since July 2023.
The key interest rate sets the cost of borrowing on things like mortgages and loans.
Governor Tiff Macklem said monetary policy has worked to bring inflation back to the two per cent target.
Macklem also noted that lower interest rates are beginning to pass through to stronger spending by households.
“But the economy remains in excess supply and the growth outlook now appears softer than we projected in October,” said Macklem.
A number of policy measures have been announced that will affect the outlook for growth and inflation in the months ahead, he said.
That includes reduced immigration targets and the temporary two-month tax break on some consumer products set to take effect on Saturday.
The tax holiday is expected to temporarily lower inflation to around 1.5 per cent in January, but Macklem said the effect will be unwound after it ends in mid-Febraury.
While the upward and downward pressure on prices have been moderating, the governor said risks to the inflation outlook remain.
“Elevated wage increases combined with weak productivity could push inflation up. Or the economy could keep growing below its potential, which would pull inflation down,” said Macklem.
In addition, said Macklem, the economic outlook is clouded by the possibility of new tariffs on Canadian exports to the United States.
Macklem added that with the policy rate now substantially lower, they will be evaluating the need for further reductions one decision at a time.
The next decision is scheduled for Jan. 29.
