The Bank of Canada cut its benchmark interest rate a half point Wednesday to 3.25 per cent, close to what some economists consider a neutral setting.

Policymakers said the unusually aggressive move—the central bank’s second consecutive half-point cut—was justified by slower-than-expected economic growth. Governor Tiff Macklem signalled the bank would shift to a “more gradual approach” in the new year, suggesting a return to quarter-point adjustments and maybe even a pause. 

Fortune favours the bold: There was an argument for a smaller cut. 

Macklem noted in a statement that the U.S. economy is strong, which is always good for Canada. Wages are growing faster than productivity, a condition that models suggest could be inflationary. Household consumption is picking up and the housing market is showing signs of life. Some measures of inflation continue to hover above the bank’s two per cent target. 

However, the economy is weaker than the Bank of Canada anticipated it would be when it last made a forecast. The unemployment rate has jumped to 6.8 per cent, as the pool of job seekers grew faster than hiring. Gross domestic product expanded at an annual rate of only about one per cent in the third quarter, and the central bank said the fourth quarter “looks weaker than projected.” Business investment and exports have been disappointing, putting a disproportionate burden on debt-laden households to drive the economy forward. 

“We have cut the policy rate by 50 basis points at each of the last two decisions because monetary policy no longer needs to be clearly in restrictive territory,” Macklem said. “We want to see growth pick up to absorb the unused capacity in the economy to keep inflation close to two per cent.” 

Headwinds gather: U.S. president-elect Donald Trump’s tariff threats loomed over the Bank of Canada’s final policy meeting of 2024. The half-point cut was based on math: the economy is weaker than forecast, so it made sense to adjust interest rates accordingly. But an uncertain outlook provided reason to get ahead of what could be a difficult year. 

“No one knows how this will play out in the months ahead—whether tariffs will be imposed, whether exemptions get agreed or whether retaliatory measures will be put in place,” Macklem said. “This is a major new uncertainty.” 

A second source of uncertainty is the federal government’s decision to cut immigration targets. The population surge has floated economic growth; on a per capita basis, GDP has been in steady decline. Macklem said the central bank will have more to say on the new immigration targets in January, but foreshadowed their updated forecast 2025 will be lower than policymakers anticipated in October. 

The next move: The Bank of Canada theorizes that in a perfect world, an interest rate between 2.25 per cent and 3.25 per cent would balance upward and downward pressures on inflation. The benchmark rate is now at the top of that range, so borrowing costs might become a lesser consideration in spending and investing decisions. The glum outlook suggests more cuts are coming, but at a more careful cadence. Early betting will be for a quarter-point cut at the next announcement on Jan. 29.