**Canada’s Central Bank Implements Consecutive ‘Big Cut’s; Brazil Hikes Rates by 100bp to Defend Real**
– *Tiff Macklem, Governor of the Bank of Canada. AP News.*
As the inauguration of the second Trump administration in the U.S. approaches, major central banks globally are taking divergent paths. Canada, expected to be hit directly by the Trump-initiated ‘tariff bomb,’ is cutting interest rates. Meanwhile, Brazil, South America’s largest economy, has raised its rates significantly to defend against the rapid depreciation of its currency, the real.
On the 11th (local time), reports from the Wall Street Journal (WSJ) state that the Bank of Canada reduced its overnight repo rate—the benchmark interest rate—from 3.75% to 3.25%, marking a 50bp drop. This is the fifth cut this year after similar moves in June, July, September, and October. The ‘big cut’ is interpreted as a response to declining corporate investment and slowing growth.
Particularly noteworthy was Bank of Canada Governor Tiff Macklem’s mention of ‘Trump risk,’ drawing considerable attention. Earlier, Trump had threatened via his social media to impose a 25% tariff on Canadian imports after his inauguration. Given that over 20% of Canada’s GDP is directly and indirectly tied to trade with the U.S., the realization of these tariffs could substantially impact the Canadian economy. Governor Macklem described the 25% tariff talk as “very destructive and a cause of great uncertainty.” He warned that “such measures could have a tremendous impact on the Canadian economy.” This backdrop fuels speculation that Canada might further cut rates next year. The Financial Times (FT) noted that “economists believe that if Trump scraps trade agreements, Canada’s interest rates are likely to fall further.”
Conversely, Brazil raised its benchmark interest rate. The Brazilian Central Bank decided to set its benchmark rate, Selic, at 12.25%, a significant 100bp increase from before. Having raised rates three times consecutively in September, November, and December, the Brazilian bank announced plans for two more 100bp hikes, potentially pushing the rate to 14.25% by next March. This move is interpreted as a response to soaring inflation and the plummeting real value. Brazil’s current inflation rate exceeds the target at the upper 4% range, while the real has depreciated by about 20% against the U.S. dollar this year.
Meanwhile, in response to the Trump tariff impact, China might allow its currency to weaken next year, according to reports. Reuters, citing multiple sources, reported that Chinese leaders and policymakers are considering permitting the yuan to weaken to counter anticipated U.S. tariff hikes. The People’s Bank of China believes the current yuan value, approximately 7.25 against the dollar, could drop to 7.5.