The Bank of Canada reduced its benchmark interest rate by 50 basis points on Wednesday, marking the fourth consecutive rate cut since June. This adjustment brings the central bank’s policy rate down to 3.75%. The move, widely anticipated by economists, comes as inflation has slowed more than expected, returning to the central bank’s target of 2%.
“We made a larger cut today because inflation is back at the 2% target, and we want to keep it close to this level,” stated Governor Tiff Macklem in his opening remarks.
Macklem emphasized the central bank’s new focus: maintaining low and stable inflation, ensuring that Canada’s economic landing remains smooth.
Analysts and Experts React
Economic experts and market analysts reacted swiftly to the Bank of Canada’s decision. Capital Economics’ Deputy Chief North America Economist Stephen Brown predicts a similar cut in December, noting that economic growth isn’t accelerating fast enough to close the output gap.
“We foresee another 50 basis point cut in December, provided inflation data remains favorable,” Brown commented.
Karl Schamotta, Chief Market Strategist at Corpay, also noted that today’s announcement increases the likelihood of another significant cut in December. “The probability of a larger rate adjustment in December has risen,” he remarked.
Market Sentiment and Reactions
Phil Mesman from Picton Mahoney Asset Management described the decision as an “insurance cut,” adding that the bond market’s response was modest, with minimal weakening of the Canadian dollar. Mesman noted that another similar cut in December remains likely, contingent upon the data aligning with the Bank of Canada’s forecasts.
TD Economics Senior Economist James Orlando believes that the BoC’s confidence has grown, allowing for quicker rate reductions. “Rates are still too high given the state of the economy, even with these successive cuts,” he wrote, predicting another 150 basis points of reductions by next year.
Impact on the Housing Market
The rate cut is expected to influence the housing market positively. Adrian Rocca, CEO of Fitzrovia, welcomed the Bank’s move as critical to addressing Canada’s ongoing housing crisis. “It’s the kind of action we need, but innovation in building and financing remains crucial for long-term solutions,” he noted.
Victor Tran, a mortgage expert at Ratesdotca, expects a surge in pre-approvals as buyers anticipate rising demand. “The market may heat up quickly, leading to an unseasonably active winter and spring,” he added.
Phil Soper, CEO of Royal LePage, foresees increased homebuyer activity but cautions that rising home prices may offset the advantages of lower borrowing costs.
Economists Weigh In on Future Rate Cuts
CIBC Chief Economist Avery Shenfeld described today’s cut as a “no-brainer,” highlighting the central bank’s success in bringing inflation down. He suggests that further cuts are likely, depending on future data, while maintaining flexibility on the size of these adjustments.
Central Bank’s Economic Projections
The Bank of Canada’s monetary policy report indicates an expected gradual increase in economic growth, fueled by the lowered interest rates. The central bank projects GDP growth to be around 1.2% for 2024, gradually increasing to 2.1% next year. Growth is anticipated to reach approximately 2% in the first half of 2025 before rising further to 2.5% in the second half.
Despite these optimistic forecasts, the Bank acknowledged the potential for volatility given uncertainties related to population growth and economic conditions.
Key Insights from Governor Macklem’s Statement
Governor Macklem provided several critical insights during his statement:
- On the Labour Market: Job losses have been minimal, but weak business hiring has disproportionately impacted young people and newcomers.
- On Inflation Trends: Inflation has come down due to lower global oil prices and a reduction in costs for shelter and consumer goods. Macklem indicated that inflation risks are balanced, with a focus on keeping it close to target levels.
- On Future Rate Cuts: The Bank of Canada anticipates further cuts if the economy aligns with forecasts. “We will assess each decision individually based on incoming information,” Macklem added.
Final Remarks: Bank of Canada’s Perspective
Macklem concluded his remarks by emphasizing that inflation is now back at its target, and the central bank is focused on keeping it stable. “We are back to low inflation, and this is positive news for Canadians,” he said, outlining the central bank’s ongoing commitment to economic stability.
The Bank’s shift in tone signals a cautious optimism, indicating that inflation risks are now balanced, allowing the central bank to remain flexible in its approach to future rate adjustments.
