The Bank of Canada cut its benchmark overnight rate by an outsized 50 basis points this morning – a step that broadly matched market expectations – but also telegraphed a more gradual approach in months to come, generating a modest advance in the loonie. In the official statement setting out the decision, policymakers said “With inflation around 2 percent, the economy in excess supply, and recent indicators tilted towards softer growth than projected,” making it reasonable to “reduce the policy rate by a further 50 basis points to support growth and keep inflation close to the middle of the 1-3 percent target range”.

Officials noted that recently-announced changes in immigration policies, payments to consumers, and temporary tax reductions could complicate the picture for growth and inflation in the months ahead, but signalled a willingness to “look through” these temporary factors, focussing on “underlying trends” as they move rates toward neutral. The statement also acknowledged uncertainties related to Donald Trump’s recent trade threats, saying “the possibility the incoming US administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook”.

Green shoots were given relatively short shrift, with policymakers saying “consumer spending and housing activity both picked up,” in the third quarter, “suggesting lower interest rates are beginning to boost household spending”.

But a more cautious tone was in evidence – the central bank said it will be “evaluating the need for further reductions in the policy rate one decision at a time,” after previously saying “if the economy evolves broadly in line with our latest forecasts, we expect to reduce the policy rate further”.

The loonie’s risk profile remains highly asymmetric:

Bad news is, to a significant degree, already priced into the exchange rate, and traders have been bracing for a widening in the gap between US policy rates and their Canadian equivalents for months. An improvement in domestic fundamentals or a slowdown in the American economy could deliver modest exchange rate gains in the new year.

But with household debt burdens continuing to grow, and the threat of a new trade war stalking the Canadian economy, any upside will be limited, and downside exposures will remain significant.