On Wednesday, the Bank of Canada implemented its third consecutive interest rate cut, reducing the key rate to 4.25%. This decision, reflecting the continued easing of inflationary pressures, aligns with previous cuts made in June and July, when the rate was lowered to 4.75% and 4.5%, respectively.
Governor Tiff Macklem indicated that while the 25-basis point reduction was deemed appropriate at this time, the central bank remains prepared to take more significant actions if necessary. “If we need to take a bigger step, we’re prepared to take a bigger step,” Macklem stated, adding that the current adjustment was a measured approach given the economic context.
Despite the gradual reductions, some experts anticipated a more aggressive cut of 50 basis points. However, Macklem emphasized that the decision was made after extensive discussion and a strong consensus. He suggested that further reductions might be considered if inflation trends significantly weaker than expected.
Canada’s annual inflation rate has decreased to 2.5% as of July, down from 2.7% in June and the lowest since March 2021. This decline reflects a reduction in inflationary pressures, though the economy still faces challenges. Macklem acknowledged ongoing upward pressures on prices, particularly in housing and services, but noted that these pressures have eased slightly since the last rate cut.
Economic growth has shown resilience, with a 2.1% expansion in the second quarter of 2024, surpassing earlier forecasts. Nonetheless, economic activity has softened in recent months, and unemployment has risen to 6.4%, predominantly affecting youth and new immigrants.
Critics, including Avery Shenfeld from CIBC Economics, argue that the current rate cut may not be sufficient to stimulate the economy robustly. Shenfeld suggested that further reductions might be necessary to invigorate economic activity, particularly in light of persistent high unemployment rates.
The recent rate cut comes after a prolonged period of stagnancy, with the rate held steady at 5% since July 2023. This high rate followed an aggressive tightening campaign initiated in April 2022 to combat elevated inflation.
As interest rates influence mortgages and personal loans, Canadians with variable rate loans will immediately benefit from the reduced rate. However, broader economic impacts may take time to materialize. Business owners like Boaz Rachamim of Eisenbergs Sandwich Co. are cautious, noting that while the cut is a positive step, it may not yet be substantial enough to prompt significant investment decisions.
The Bank of Canada’s cautious approach reflects a broader strategy to manage inflation while supporting economic growth, with future decisions likely influenced by ongoing economic data.
