Bank of Canada cuts key interest rate to 3.75%

The Bank of Canada (BoC) on Wednesday lowered its key interest rate by 50 basis points to 3.75%, marking its first larger-than-usual adjustment in over four years. The move reflects the central bank’s view that Canada has entered a period of low inflation.

Having previously raised rates to a 20-year high to combat inflation, the BoC has now implemented four consecutive rate cuts since June. Inflation dropped to 1.6% in September, falling below the 2% target.

“We took a bigger step today because inflation is now back to the 2% target, and we want to keep it close,” Governor Tiff Macklem said in his opening remarks.

Despite three earlier rate cuts totaling 75 basis points, economic activity remains weak, with sluggish business sales, subdued consumer sentiment, and limited demand growth.

“Today’s rate cut should encourage a rebound in demand,” Macklem stated, adding that the bank hopes for an uptick in economic growth.

Last month, the U.S. Federal Reserve also began a rate-cutting cycle with a similar reduction. The BoC’s latest 50-basis-point cut was its first of that size at a scheduled meeting since March 2020.

The 1.6% inflation rate in September raised concerns that high borrowing costs may have curbed inflation more than necessary, potentially dampening economic performance.

Based on economic data and internal surveys, Macklem remarked, “All this suggests we are back to low inflation. This is good news for Canadians.” He emphasized the bank’s goal of maintaining “low, stable inflation,” saying, “We need to stick the landing.”

Ahead of the announcement, markets had anticipated a smaller, 25-basis-point cut in the BoC’s final monetary policy decision of the year, set for December 11.

Macklem noted that if the economy evolves as expected, further rate cuts are likely, with their timing and pace depending on upcoming data.

High interest rates have weighed on Canada’s economy, with July GDP increasing by only 0.2% month-over-month, and preliminary data suggesting no growth in August.

In its updated monetary policy report (MPR) released alongside the rate announcement, the BoC revised its third-quarter GDP growth forecast to 1.5% annualized, down from the 2.8% forecast in July, while keeping the full-year outlook at 1.2%.

The MPR projects inflation to average 2.5% in 2024, gradually falling to 2.2% in 2025 and 2.0% by 2026. However, the bank remains cautious about potential inflationary deviations.

“The economy functions best when inflation stays close to 2%,” Macklem reiterated.