The Bank of Canada cut its benchmark rate by 50 basis points on Wednesday as inflation continues to fall, and economic growth slows.
The central bank issued its single-largest cut in four years, just days after Canada’s inflation fell for a fourth month in a row. The country’s interest rate now stands at 3.75 per cent.
“We took a bigger step today because inflation is now back to the two per cent target and we want to keep it close to the target,” wrote Bank of Canada governor Tiff Macklem in a statement posted online on Wednesday.
Inflation hit a three-year low of 1.6 per cent in September, falling from two per cent in August and 2.5 the month prior, according to data from the Bank of Canada. “Inflation is a persistent rise in the average level of prices over time,” as defined by the Bank of Canada.
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The move represents a shift in the central bank’s strategy from lowering inflation to now shoring up the economy.
Bank of Canada economists have forecasted that the country will post 1.2 per cent growth in GDP for 2024, less than half the 2.8 per cent estimate for the U.S. and one of the lowest among G7 peers.
“The Bank of Canada’s decision was motivated by slow growth in GDP and a weak labour market with unemployment heightened at 6.5 per cent,” Constantine Angyridis wrote in an email. Angryridis is an economics professor at TMU, and he says the state of the country’s labour market also factored into the bank’s decision Wednesday.
Angyridis said the bank hopes the supersized cut will help. “The bank expects that this [rate cut] will stimulate the economy, causing GDP to increase and the unemployment rate to decline.”
In a September release, TD Bank wrote that the federal government needs to lower immigration to help stabilise the employment market as well. For unemployment to fall by 13 per cent, a “substantial cooling in labour force growth” will be required.
Stagnating employment in Canada comes as a contrast to its southern neighbour.
The U.S. added 254,000 jobs in September, climbing from August’s 159,000 figure and lowering the unemployment rate in that country to 4.1 per cent.
Flipped job market conditions, combined with stronger American economic growth, will likely contribute to diverging policy decisions by the Bank of Canada and the U.S. Fed, says Angyridis. “Currently, growth in the U.S. economy is the strongest among advanced economies, while growth in Canada is quite weak at the moment. I expect the divergence in the interest rate policies implemented by the Bank of Canada and the Fed to continue,” he wrote in an email.
The Bank of Canada is scheduled to announce its next interest rate announcement on Dec. 11.
