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The Bank of Canada has lowered interest rates by a bumper half a percentage point to 3.75 per cent, with rate-setters resorting to a bigger cut to boost weakening growth.
The widely expected cut was the fourth in a row by the G7 country’s central bank. However, earlier cuts had been of a smaller, quarter-point, margin.
Tiff Macklem, the governor of the Bank of Canada, told reporters there was “clear consensus” for a bigger cut this time.
“From what we saw in the recent data, there was broad agreement to take a bigger step today. If the economy continues to evolve in line with our forecast, we will be cutting rates further,” he said.
The central bank’s jumbo move comes after Canada’s inflation fell below its 2 per cent goal, hitting 1.6 per cent in the year to September.
Both price pressures and growth have fallen markedly in Canada in recent quarters.
This month, Statistics Canada reported that September’s unemployment rate was 6.5 per cent, a slight dip from August but still almost 2 percentage points higher than the record low of 4.8 per cent set in July 2022.
The IMF said on Tuesday that Canada’s economy would grow 1.3 per cent this year before expanding 2.4 per cent in 2025.
Jim Thorne, chief market strategist at Wellington-Altus Private Wealth, said lower borrowing costs would not fix the Canadian economy’s broader problems.
“Rate cuts are not a magic bullet,” he said. “Eighty per cent of GDP growth in the second quarter can be attributed to government spending.”
Nathan Janzen, economist at the Royal Bank of Canada, agreed that the economy’s structural challenges remained, despite lower borrowing costs.
“The GDP per-capita rate is in its sixth quarter of decline, unemployment is up, so the economy is now softer, there is even [a] risk inflation [runs] well below the 2 per cent target rate,” Janzen said.
The latest Canadian cut comes after the European Central Bank lowered its policy rate by a quarter-point last week. The US Federal Reserve last month reduced its benchmark target range by half a percentage point, its first cut in more than four years.
Geoff Phipps, trading strategist and portfolio manager at Picton Mahoney Asset Management, said the Bank of Canada had, until now, not been accommodative enough.
“The Canadian economy appears to be struggling under overly restrictive monetary policy with a large mortgage renewal wall next year,” he said.
Prime Minister Justin Trudeau has applauded the central bank’s recent rate cuts as a sign Canada’s economy is back on track.
On Wednesday, he said on social media site X that the latest move was “good news”, telling Canadians the cost of buying a home or renewing their mortgages was coming down.
In September, Trudeau also announced significant reforms to the country’s migration policy, including its foreign workers programme that has been blamed for soaring housing costs, pressure on the healthcare system and rising youth unemployment.
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