Canada’s central bank has cut interest rates by 50-basis points as the country’s economy grows at a slower rate than originally projected.
The fifth consecutive cut comes at a time when Canada’s economy grew by one per cent in the third quarter of 2024, and the Bank of Canada states that the fourth quarter is looking to be weaker than it originally projected.
Macklem observed that lower interest rates boosted consumer spending and housing activity.
The rising unemployment rate in Canada, which reached 6.8 per cent in November, also influenced the decision to cut interest rates. The bank noted that the number of people seeking work grew faster than the availability of jobs.
“Monetary policy no longer needs to be clearly in restrictive territory,” said Bank of Canada governor Tiff Macklem in a statement.
“It has been especially hard for young people and newcomers to Canada to find work.”
The federal government significantly shifted its immigration policy, which has calmed population growth in the country. Some private sector economists believe this change could drive unemployment even higher in the coming months.
“We expect the jobless rate to push higher yet, likely averaging 7 per cent in the first quarter of next year, before receding slightly,” said Douglas Porter, BMO’s chief economist in a recent analysis paper.
Macklem expressed uncertainty about how the situation will unfold in the coming months, including whether tariffs will be implemented, exemptions negotiated, or retaliatory actions taken.
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Tariff threat makes Bank of Canada consider new measures
The central bank predicts that inflation will stay near the two per cent target over the next two years, citing eased shelter price inflation and lower inflation from goods prices. However, Macklem warned that elevated wage increases combined with weak productivity could drive inflation higher.
Last month, the federal government introduced a two-month GST holiday on a wide range of consumer goods.
“We expect the GST holiday to temporarily lower inflation to around one-and-a-half per cent in January,” said Macklem.
The central bank stated that proposed one-time payments of CAD$250 for working Canadians earning less than CAD$150,000 last year, along with changes to mortgage rules, will influence demand and inflation dynamics. Consequently, the bank plans to take a more “gradual approach” to future rate decisions.
The central bank considered the possibility of new spending on the Canada-U.S. border, which the Liberal government may introduce next month ahead of Donald Trump’s inauguration. Trump has called for increased border security to curb illegal migration and drug trafficking.
The government has not disclosed how much it plans to spend, but details may emerge in the Fall Economic Statement, set to be presented by Finance Minister Chrystia Freeland on December 16. The Bank of Canada will announce its next overnight rate target on January 29, 2025.
This central bank’s considerations regarding increased government spending, potential interest rate hikes, and overall economic uncertainty could have significant downstream effects on investors and industry,
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Gold performs well during periods of economic turbulence
For investors, any uncertainty around fiscal policy, such as the proposed border security spending or the impact of new tariffs, could lead to a more cautious outlook. If these factors result in higher inflation or economic instability, investors might shift their focus to gold as a safe haven.
Gold typically performs well during periods of economic turbulence, making it an attractive asset when other markets show volatility. As a result, we may see increased demand for gold, benefiting producers like Calibre Mining Corp (TSE: CXB) (OTCMKTS: CXBMF), which has an emerging Canadian operation in Newfoundland and has seen growth driven by favourable gold prices.
On the other hand, if the government’s fiscal measures lead to higher interest rates to combat inflation, this could make non-yielding assets like gold less appealing, potentially putting downward pressure on gold prices.
The gold mining sector, in particular, may experience mixed outcomes.
Large producers such as Barrick Gold Corporation (TSE: ABX) (NYSE: GOLD) and Newmont Corporation (TSE: NGT) (NYSE: NEM), which operate globally, might face operational challenges if new tariffs or stricter border security measures delay the movement of materials or increase costs.
However, these companies are more likely to weather short-term challenges due to their size and diversified operations.
Conversely, if the Canadian government’s fiscal policies lead to economic instability or inflation, Calibre and other gold miners could benefit from a flight to safety, driving gold prices up and improving their financial outlook.
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Calibre Mining is a sponsor of Mugglehead news coverage
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joseph@mugglehead.com
