The Bank of Canada lowered its key interest rate by 25 basis points on Wednesday and opened the door to bigger cuts if the economy slows more sharply in the months ahead.
The third consecutive rate cut was widely expected by economists and brings the central bank’s benchmark interest rate to 4.25 per cent.
Wednesday’s decision marks the first time since the global financial crisis in 2009 that the Bank of Canada has cut rates at three meetings in a row.
The policy rate, which widely sets the cost of borrowing across Canada and informs the rates many Canadians get on mortgages and other loans, has fallen 75 basis points since the easing cycle began in June.
“If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate,” Bank of Canada governor Tiff Macklem told reporters Wednesday.
“We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time.”
Could the Bank of Canada cut by 50 basis points?
Asked Wednesday whether the central bank debated a steeper cut of half a percentage point, Macklem did not answer directly, but he did not rule out a change of pace moving forward.
“We did discuss some different scenarios. Scenarios where it might be appropriate to slow the decline in interest rates… and where it might be appropriate to cut by 50 basis points,” he said.
Macklem explained that if the economy proves stronger than anticipated and inflation more stubborn, the Bank may pause its easing cycle at a future decision. But he added that if the economy “was significantly weaker … yes, it could be appropriate to take a bigger step, something bigger than 25 basis points.”
Randall Bartlett, senior director of Canadian economics at Desjardins, told Global News Wednesday that he does not currently expect the Bank of Canada will take any oversized steps as the benchmark interest rate trends lower.
He calls for two more 25-basis-point cuts this year and six more to follow in 2025, eventually bringing the policy rate to a resting point of 2.5 per cent.
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Financial markets see a 93 per cent chance of a rate cut of 25 basis points in October while a rate reduction in December is fully priced in, according to Reuters.
CIBC chief economist Avery Shenfeld echoed calls for a series of quarter-point cuts through to March 2025 in a note to clients Wednesday.
He added that moving in bigger, 50-basis-point steps would be “defensible” given the positive inflation trends of recent months, but noted that the Bank of Canada’s appetite for easing appears satiated with 25-basis-point moves.
Shenfeld noted that if inflation or jobs data comes in particularly weak over the coming months, the central bank may take oversized steps as part of a “bolder pace of easing.”
The Bank of Canada will get its next look at the labour market on Friday when Statistics Canada releases the employment data for August.
Dawn Desjardins, chief economist at Deloitte Canada, told Global News on Wednesday that the oversized steps of 50, 75 and even 100 basis points seen during the rapid tightening cycle reflected an “emergency” situation as inflation rapidly surged to levels not seen in more than 40 years.
But the situation now, with inflation gradually floating back to earth, is just telling the Bank of Canada that its policy rate doesn’t have to be as “prohibitively high” as it was during the peak of the tightening cycle.
“So do we really need to have interest rates that are really causing some friction for many households and businesses who have to finance at higher costs? I don’t think so. And I think that’s what the Bank is really saying,” she said.
Bartlett also said that Wednesday’s messaging from the Bank of Canada reflects a sense of “calm,” not a fear that the economy is heading towards a steep downturn.
“To see a 50-basis-point cut, we would need to see a material decline or softening in economic activity,” he said.
'The runway's in sight' for soft landing: Macklem
Annual inflation has continued to cool through 2024, last coming in at 2.5 per cent in July. Macklem noted on Wednesday that while shelter inflation continues to run hot, there have been signs of easing for renters as of late, as well as for Canadians renewing their mortgages as the central bank’s policy rate continues to fall.
He meanwhile acknowledged that signs of slowing in the June and July gross domestic product results mean the Bank of Canada’s calls for a pickup in third-quarter economic growth might now be ambitious. He said there are risks that uptick might be weaker than previously thought in the central bank’s latest forecasts from July.
Macklem said the Bank of Canada’s governing council would be “guided by incoming information” and the projected impacts on the inflation outlook in deciding the future path for interest rates.
While the Bank of Canada is expecting inflation to ease further in the months ahead, Macklem’s commentary noted a risk that price pressures may “bump up later in the year,” largely the result of the previous year’s drops falling out of the annual comparison.
Economists and market watchers have noted a tone shift from the Bank of Canada in recent months: downplaying concerns that it won’t hit its mandated two per cent target and instead focusing on deterioration in the labour market and the wider economy.
Macklem also reiterated in his comments Wednesday that the central bank is as worried about inflation dipping below two per cent as it is stalling above the target.
“With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” he said.
Bartlett said that dipping too far below two per cent inflation risks tipping the economy into deflation, or a “broad decline in prices.” While that might sound great to Canadians who are still struggling to make ends meet, he explained that deflation poses a serious risk to the economy that could hamper businesses and lead to wider layoffs.
“That’s really the soft landing that the Bank of Canada is trying to make,” Bartlett said. “So get inflation back to something that’s low, stable and predictable, but making sure to not drive the economy into some sort of recession at the same time.”
While Macklem stopped short of declaring that the Canadian economy has successfully skirted a recession as inflation nears the two per cent target, he maintained that the Bank of Canada is getting closer to the coveted “soft landing.”
“We haven’t landed the economy yet. The runway’s in sight, but we have not landed it yet,” he said.
The Bank of Canada’s next interest rate announcement will come on Oct. 23, alongside updated forecasts for inflation and the Canadian economy.
— with files from Global News’s Jillian Piper and Reuters
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