Bank of Canada cuts rates, hails ‘good news’ on low inflation

Ottawa | Reuters—The Bank of Canada on Wednesday reduced its key benchmark rate by 50 basis points to 3.75 per cent, its first bigger-than-usual move in more than four years, and hailed signs the country has returned to an era of low inflation.

The central bank, which hiked rates to a 20-year high to fight soaring prices, has now cut four times in a row since June. Inflation in September sank to 1.6 per cent, below the two per cent target.

“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,” Governor Tiff Macklem said in his opening remarks.

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Despite three previous cuts totaling 75 basis points, demand has been muted, sales at businesses are sluggish and consumer sentiment is tepid, hurting economic growth.

“Today’s interest rate decision should contribute to a pickup in demand,” Macklem said, adding that the BoC would like to see growth strengthen.

The U.S. Federal Reserve last month started its own rate reduction cycle with a similar size move.

The last time the Bank of Canada cut rates by 50 basis points at a scheduled meeting was in March 2020.

The headline September inflation rate of 1.6 per cent underscored concerns the high cost of borrowing might have suppressed the rise in prices more than the economy needed.

Macklem, referring to recent economic data and the bank’s own surveys, said, “All this suggests we are back to low inflation. This is good news for Canadians”.

He continued: “Now our focus is to maintain low, stable inflation. We need to stick the landing.”

Money markets are fully pricing in a 25-basis-point cut in the final monetary policy decision announcement of the year on Dec. 11. They are seeing an over 25 per cent chance of another 50-basis-point cut.

The Canadian dollar was down 0.15 per cent at 1.3839 to the U.S. dollar, or 72.26 U.S. cents. Yields on Canada’s two-year government bond eased 2.1 basis points to 3.013 per cent after the rate cut announcement.

Macklem reiterated that if the economy continues to evolve broadly in line with forecasts, the bank would cut rates again, with the timing and pace depending on the latest data.

Canada’s economic growth has sputtered under the impact of high rates. July GDP grew by just 0.2 per cent on a monthly basis and provisional data suggest August growth will likely stall.

The bank revised its forecast for quarterly and annual growth in its latest monetary policy report (MPR) released along with the rates announcement on Wednesday.

It now expects annualized GDP growth in the third quarter to be 1.5 per cent, down from the 2.8 per cent it predicted in July, but kept its full year forecast unchanged at 1.2 per cent.

The overall annual inflation rate this year is seen at 2.5 per cent, falling to 2.2 per cent in 2025 and 2.0 per cent in 2026, the MPR showed.

The bank, however, is still concerned about inflation coming in higher or lower than expected going forward. “The economy functions well when inflation is around two per cent,” Macklem said.