Bank of Canada delivers half percentage point rate cut
The Bank of Canada delivered a supersized interest rate cut Wednesday in response to the recent decline in inflation, bringing its key policy rate down by half a percentage point.
With annual price growth now around 2.0%, the central bank says its job has shifted from lowering inflation to maintaining it around the inflation target.
“We took a bigger step today because inflation is now back to the two per cent target and we want to keep it close to the target,” Governor Tiff Macklem said in his opening statement. Canada’s inflation rate fell to 1.6%in September, solidifying forecasters’ expectations for a larger rate cut. Bigger cuts mean the rate can be lowered faster.
Wednesday marked the central bank’s fourth consecutive interest rate cut since June. Its policy rate now stands at 3.75%, down from a height of 5.0%.
The Bank of Canada attributes the slowdown in price growth to shelter price inflation easing, supply outpacing demand in the economy and global oil pricing falling. It’s now forecasting inflation will remain around the 2.0% target throughout its projection horizon, which extends to 2026.
READ: Annual inflation falls to 1.6% in September, smallest yearly increase since 2021
High interest rates have sent a chill through the Canadian economy, slowing growth and loosening the labour market.
The central bank says in its monetary policy report that while layoffs have remained stable, businesses have pulled back on hiring, which has disproportionately affected young people and newcomers.
In remarks released by the Bank of Canada about the interest rate cut, it said that consumption has continued to grow but is declining on a per person basis. “Exports have been boosted by the opening of the Trans Mountain Expansion pipeline. The labour market remains soft — the unemployment rate was at 6.5 per cent in September. Population growth has continued to expand the labour force while hiring has been modest. This has particularly affected young people and newcomers to Canada. Wage growth remains elevated relative to productivity growth. Overall, the economy continues to be in excess supply,” the Bank of Canada said.
GDP growth is forecast to strengthen gradually over the projection horizon, supported by lower interest rates. It added that this forecast “largely reflects the net effect of a gradual pick up in consumer spending per person and slower population growth. Residential investment growth is also projected to rise as strong demand for housing lifts sales and spending on renovations. Business investment is expected to strengthen as demand picks up, and exports should remain strong, supported by robust demand from the United States.”
As interest rates continue to come down, the Bank of Canada is projecting economic growth to pick back up in 2025 and 2026.
Macklem said the central bank expects cutting its key interest rate further, so long as the economy evolves in line with its forecast. “High inflation and interest rates have been a heavy burden for Canadians. With inflation now back to target and interest rates continuing to come down, families, businesses and communities should feel some relief,” Macklem said.
The Bank of Canada’s next interest rate announcement is scheduled for Dec. 11.
With additional files from The Canadian Press
