The Bank of Canada cuts interest rates by 50 bps.

The Canadian dollar strengthened to approximately 1.41 CAD per USD as the Bank of Canada signaled a slower pace of future rate cuts following its latest 50-basis-point reduction. This rate cut, which aligned with market expectations, shifted investors' focus toward the central bank's future policy outlook. Additionally, new financial measures are expected to support the economy, boosting investor confidence further.

The Bank of Canada reduced its policy interest rate by 50 basis points, marking the second consecutive rate cut at its recent meeting. This move aligns with market forecasts that the central bank would lower rates by a total of 175 basis points this year. Policymakers stated there would be no severe rate cuts in 2025. The aggressive rate reductions followed data showing Canada’s GDP grew by 1% annually in the third quarter, below the central bank's expectations, with growth in the fourth quarter also at risk of underperforming. However, other indicators suggested consumer spending exceeded forecasts. The central bank anticipates inflation to remain near its 2% target over the next 2–3 years, but potential tariffs under a future U.S. administration could drive inflation higher.

Canada’s service sector PMI rose to 51.2 in November, its highest increase since April, reflecting two consecutive months of growth. Despite this, overall expansion remains stable, with new business growth stagnant since October. Export-oriented businesses have been a key factor in the service sector’s continued slowdown, exacerbated by global tensions and rising living costs, which have dampened both domestic and international demand. However, employment levels rose to their highest in 14 months. Input costs showed a slight decline but remained elevated.

Meanwhile, manufacturing PMI improved to 52.0 from 51.1 in October, marking the strongest growth in manufacturing activity since 2023 and the third consecutive month of expansion. Output reached a two-year high, while new orders continued to grow for the 21st consecutive month, driven mainly by domestic demand. However, export orders continued to decline. Employment trends remained positive, with firms preparing for increased production. Production costs saw the sharpest rise in 18 months due to the rapid strengthening of the U.S. dollar, which increased import costs and led to the highest production expenses in three months.

The yield on Canada’s 10-year government bonds surged to 3.1%, fueled by expectations of more defined monetary policies amidst rising inflationary pressures. The recent 50-basis-point rate cut and cautious tone on further reductions signaled to investors that future rate cuts might slow, driving bond yields higher. Inflation risks from potential tariff increases and stronger-than-expected consumer spending remain factors for consideration.