This cut comes as the central bank aims to stimulate a slowing economy. Previous reductions had been more modest, typically at a quarter-point. Governor Tiff Macklem highlighted a “clear consensus” among policymakers regarding the necessity of this larger cut. He noted that recent economic data supported a more aggressive approach, indicating that if current trends continue, further reductions could be on the horizon.
This latest interest rate adjustment follows a drop in Canada’s inflation rate, which fell to 1.6 per cent in September, well below the central bank’s target of 2 per cent. Additionally, the economy has been experiencing declining price pressures and growth over recent quarters. Statistics Canada recently reported an unemployment rate of 6.5 per cent for September, which, while slightly lower than August’s figures, remains nearly two percentage points above the record low of 4.8 per cent achieved in July 2022.
The International Monetary Fund (IMF) projects that Canada’s economy will grow by 1.3 per cent this year, with expectations for a stronger recovery at 2.4 per cent in 2025. However, some economists caution that lower borrowing costs alone will not resolve the country’s more profound economic issues.
Jim Thorne, chief market strategist at Wellington-Altus Private Wealth, remarked that while rate cuts are beneficial, they are not a panacea for the underlying challenges facing the economy. He pointed out that a significant portion of the second quarter’s GDP growth can be attributed to government spending, raising concerns about the sustainability of such growth.
Nathan Janzen, an economist at the Royal Bank of Canada, echoed these sentiments, noting that structural challenges persist despite the reduction in borrowing costs. He highlighted that the GDP per capita has been declining for six consecutive quarters, and the unemployment rate is rising, suggesting a softer economic landscape. There is even a risk that inflation could remain well below the central bank’s target.
The Bank of Canada’s decision comes amid similar actions from other major central banks. The European Central Bank recently lowered its policy rate by a quarter-point, and the U.S. Federal Reserve also cut its benchmark rate by half a percentage point last month, marking its first reduction in over four years.
In response to the rate cut, Prime Minister Justin Trudeau praised the central bank’s efforts as indicative of a recovering economy. He noted that the latest reduction would lower costs associated with buying homes and renewing mortgages, signalling potential relief for Canadian households.
Trudeau also announced significant reforms to Canada’s migration policy, including changes to the foreign workers programme, which have been linked to rising housing costs and pressures on the healthcare system. These reforms, combined with the recent monetary policy adjustments, aim to bolster the economy and address various challenges faced by Canadians.
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