The Bank of Canada delivered an oversized interest rate cut of half a percentage point on Wednesday, focusing now on boosting the Canadian economy amid signs inflation is well under control.
The central bank’s policy rate now stands at 3.75 per cent. Wednesday’s decision is the fourth consecutive drop in interest rates since June and is the Bank of Canada’s largest rate cut since the global financial crisis in 2009, outside the COVID-19 pandemic.
“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,” Bank of Canada governor Tiff Macklem told reporters Wednesday.
Since the previous interest rate cut in September, inflation has not only returned to the Bank of Canada’s two per cent target but even dropped below it to 1.6 per cent in the most recent reading.
The Bank of Canada’s revised outlook has inflation holding around the two per cent mark in the foreseeable future, allowing for some fluctuations within the target range of one to three per cent.
But with inflation largely tamed the central bank’s focus is shifting to cracks have forming in the Canadian labour market and the broader economy. The unemployment rate remains elevated at 6.5 per cent and growth in the third quarter has significantly undershot the central bank’s previous estimates.
The Bank of Canada is hoping that cuts to the policy rate will encourage growth, making it easier for Canadians and businesses to spend and boost the economy.
What comes next for the Bank of Canada?
Macklem said that if the economy continues to evolve broadly in line with the central bank’s expectations, more interest rate cuts can be expected to boost demand and keep inflation on target. But he pushed back on reporters’ efforts to get more clarity on the pace of future interest rate cuts.
“I think we’ve been pretty clear on the direction,” he said Wednesday. “I think we’ve been pretty clear that the timing and the pace is going to depend on how the data evolves.”
The Bank of Canada’s final interest rate decision of the year is set for Dec. 11.
CIBC assistant chief economist Avery Shenfeld called the 50-basis-point step a “no-brainer” in a note to clients Wednesday, adding that “it would take a significant turn of events to stand in the way of another cut of that magnitude in December.”
But not all economists are reading the Bank of Canada’s tea leaves in the same way.
BMO chief economist Doug Porter said in a note that he believes a return to quarter-point cuts might be in store for the next meeting. He argued that the Bank of Canada’s overall forecasts for the economy have not shifted much in the long term, and there’s nothing in the central bank’s messaging that suggests anything more than mild easing unless upcoming economic data comes in much weaker than expected.
“Given the relatively modest adjustment in the bigger picture outlook on the economy, this forecast hardly calls out for urgency for additional large rate cuts,” Porter said.
The Bank of Canada’s key rate informs rates that lenders offer on many loans, particularly mortgages. Wednesday’s sizeable interest rate cut offers immediate relief to Canadians with variable rates of interest and bodes well for those with mortgages coming up for renewal.
Macklem said that he expects Wednesday’s rate cut will lead to a boost in spending among both consumers and businesses.
The Bank of Canada’s latest monetary policy report also projects a recovery in home sales and a boost in prices tied to lower interest rates. Declining borrowing costs might also help to get more homes in Canada built, the report noted, but demand is still expected to outpace supply amid persistently tight inventories across the country.
https://globalnews.ca/news/10825979/bank-of-canada-cuts-key-rate-by-50-basis-points-in-oversized-step/
