Bank of Canada To Slow Interest Rate Cuts With GST Holiday & ON Stimmy

The Bank of Canada has announced a reduction in its key policy rate by 50 basis points, bringing it down to 3.25%. This decision marks the second consecutive half-point cut aimed at stimulating the economy amid weaker-than-expected growth and a softening labor market.

In addition to the rate cut, the federal government has introduced a "GST holiday" on essentials from December 14 to February 15, 2025. This temporary suspension of the Goods and Services Tax applies to items such as restaurant meals, children's clothing, video games, certain types of alcohol, and Christmas trees. Furthermore, workers earning less than $150,000 annually will receive a $250 cheque in the spring.

The Ontario government has also announced its own stimulus measures. Taxpayers in the pve $200 cheques, with an additional $200 for each dependent child. Unlike the federal program, Ontario's initiative does not have an income cutoff, potentially reaching a broader segment of the population.

Economists at BMO Capital Markets estimate that these combined federal and provincial stil inject approximately $9 billion into the economy, equivalent to 0.3% of GDP. They anticipate this will boost GDP growth in the first quarter of 2025 from 1.7% to 2.5%, with smaller positive effects in the preceding and following quarters.

However, this fiscal stimulus is expected to influence the Bank of Canada's monetary poli Initially, markets had anticipated a 50 basis point rate cut in December. Given the new government spending and its potential to drive demand, the central bank is now expected to opt for a more modest 25 basis point reduction. This approach aims to balance economic support while mitigating the risk of overheating the economy.

These developments occur amid broader economic uncertainties, including potential trade tnited States. The Bank of Canada has expressed concerns over proposed tariffs by U.S. President-elect Donald Trump, which could adversely affect Canadian exports and economic performance.