Bank of Canada Delivers Jumbo-Sized Rate Cut to Boost Economy
The BoC lowered its benchmark interest rate by 50 bps to 3.75% on Wednesday, marking the central bank’s fourth consecutive rate cut and first oversized cut since the 2020 pandemic.
The Bank of Canada announced a significant shift in its monetary policy, cutting its key interest rate by 50 basis points to 3.75%, marking the fourth consecutive reduction in 2024. The move is designed to stimulate a sluggish economy that has seen growth taper off in recent months, with inflation finally stabilizing near the central bank’s 2% target.
In an attempt to balance inflation control with economic growth, the central bank took what it termed as a “bigger step.”
Bank of Canada Governor Tiff Macklem explained the rationale behind the decision, noting:
“We took a bigger step today because inflation is now back to the 2% target, and we want to keep it close to the target. Our focus now is maintaining low, stable inflation while supporting economic growth.”
A Bold Move to Spur Growth
The rate cut comes at a crucial moment for Canada’s economy, which has seen uneven growth throughout the year. Gross Domestic Product (GDP) is expected to grow at just 1.2% by the end of 2024, a figure that reflects the broader global economic slowdown and domestic challenges such as rising unemployment. While consumer spending has seen a slight uptick, it remains soft, especially when adjusted for per capita metrics.
Macklem highlighted the broader context in which this decision was made, emphasizing that global economic conditions, particularly in the United States and China, have also influenced the central bank’s actions.
“We’ve seen stronger growth in the U.S., while China’s domestic demand remains weak. These dynamics affect us, and we need to ensure we’re positioned to navigate the global landscape effectively,” he stated.
Easing Inflation, Economic Headwinds
Canada’s inflation has dropped significantly since its peak in 2022 when it hit 8.1%, largely driven by the fallout from the COVID-19 pandemic. Today, the Consumer Price Index (CPI) sits at 1.6%, below the Bank’s 2% goal for September. The rapid decline in inflation, alongside reduced global oil prices and excess supply in several sectors, has provided the Bank with the opportunity to shift its focus from inflation control to economic recovery.
“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,” said Macklem.
This relief is particularly significant for the housing market, which has been slow in 2024. Experts believe the half-point cut could rejuvenate the real estate sector, with mortgage brokers like Leah Zlatkin pointing out that affordability, particularly in major cities like Toronto, has remained a barrier for many homebuyers. Zlatkin commented, “This rate cut could be the push many buyers have been waiting for, especially in markets where housing affordability has been a major concern.”
Impact Rate Cut on Canadians
While the Bank’s bold rate cut is expected to ease some of the pressures on consumers, it is also seen as a response to a rise in unemployment, which now sits at 6.5%. The increase is largely attributed to an influx of young workers and newcomers, who make up a significant portion of the labor force but have struggled to find jobs.
Macklem acknowledged these challenges, saying:
“Job layoffs have remained modest, but business hiring has been weak, particularly for young people and immigrants. The number of workers has increased faster than the number of jobs, and that has driven up the unemployment rate.”
The central bank’s approach aims to gradually restore economic activity by making borrowing cheaper for businesses and consumers. The hope is that by reducing borrowing costs, companies will invest more, and consumers will feel confident enough to increase spending on interest-sensitive goods such as cars and homes.
What’s Next for Interest Rates?
Looking ahead, the Bank of Canada has signaled that it may continue on its rate-cutting path, though further reductions will depend on incoming economic data. Some economists are predicting another half-point cut by the year’s end, citing the economy’s ongoing sluggishness. “There’s no real logic in taking baby steps toward getting interest rates to a level that won’t needlessly hold back economic growth,” said Avery Shenfeld, chief economist at CIBC, after the latest rate cut.
However, the Bank remains cautious about making such predictions too early.
Macklem refused to speculate on future decisions, stating:
“I’m not going to handicap the next move. The timing and the pace of future cuts will depend on the data we see between now and December.”
The Road Ahead
The path to recovery has been long and fraught with challenges, but Macklem remains optimistic that the Bank’s efforts will pay off.
“It’s been a long road back from the high inflation we experienced coming out of the pandemic. We’re coming out the other side, and I think Canadians can breathe a sigh of relief,” Macklem said during the press conference.
Nevertheless, while inflation is under control, the Canadian economy still faces uncertainties. Geopolitical tensions, particularly in the Middle East and Ukraine, along with upcoming trade negotiations and the U.S. election, could influence inflation rates and economic stability.
The Bank of Canada’s next rate decision is scheduled for December 11, and all eyes will be on the data to see if another rate cut is on the horizon. Until then, Canadians can expect to see the effects of this half-point cut play out in various sectors, from housing to consumer spending.
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