On October 23rd, the Bank of Canada announced a significant cut in its overnight lending rate, reducing it by 50 basis points from 4.25% to 3.75%. This decision aligns with market expectations and marks the fourth interest rate cut by the Bank since early June, with this being the most substantial reduction to date.
During a press conference in Ottawa, Bank of Canada Governor Tiff Macklem explained that the larger cut was warranted due to inflation having fallen back to the target level of 2%. He emphasized the importance of maintaining low and stable inflation moving forward.
The Consumer Price Index (CPI) in Canada has dropped from 2.7% in June to 2.0% in August and further down to 1.6% in September, reaching its lowest point since February 2021. Macklem noted that recent indicators suggest the inflation rate for October is likely to remain around 2%, indicating that Canada has returned to a low inflation environment.
He pointed out that while household spending and business investment have both seen a rebound this year, they remain weak, which helps mitigate any remaining inflationary pressures. The reduction in interest rates is expected to support a resurgence in demand, thereby bolstering economic growth. As demand strengthens, the downward pressure on inflation is anticipated to ease, leading to a balance between upward and downward forces.
In the latest monetary policy report, the Bank of Canada identified two main upward risks to inflation: persistent service price inflation and potential inflationary pressures arising from global geopolitical changes. Conversely, the primary downside risks include the possibility of continued weak household spending in Canada and a slowdown in the global economy, which could lead to weaker-than-expected commodity price inflation.
Macklem indicated that if economic trends align with the Bank’s predictions, further cuts to the policy rate may be on the horizon. The timing and magnitude of any additional cuts will depend on forthcoming economic indicators and assessments of the inflation outlook.
For the first half of the year, Canada’s economic growth was around 2%, with the Bank expecting a slowdown to approximately 1.75% in the second half. However, the unemployment rate remained at 6.5% in September, reflecting ongoing weaknesses in the labor market. Overall, the economy continues to be in a state of excess supply.
The Bank of Canada’s next policy meeting is scheduled for December 11th.
