Bank of Canada Slashes Interest Rate by 50 Basis Points in Biggest Cut Since 2009

The Bank of Canada took a bold step on Wednesday, slashing its key interest rate by 0.5 percentage points, bringing it down to 3.75%. This marks the central bank’s most significant rate cut since the global financial crisis in 2009, outside of the extraordinary measures during the COVID-19 pandemic.

This is the fourth consecutive reduction in borrowing costs since June, with the latest cut coming at a time when inflation has dropped to 1.6%, well below the Bank’s 2% target. Economists had widely anticipated this aggressive move, given the recent economic conditions and a slower-than-expected growth trajectory.

While the Bank of Canada had been implementing smaller quarter-point cuts in previous months, the need for a more substantial reduction became apparent. Governor Tiff Macklem explained that the central bank is prioritizing maintaining inflation near the 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,” Macklem said in a statement.

This decision follows the previous cut in September, where inflation returned to the Bank’s target, but with further downward pressure on prices since. The 1.6% inflation rate for September, below the 2% goal, indicated that the high cost of borrowing had restrained price increases more than anticipated.

The latest rate cut is welcome news for many Canadians, especially those with variable-rate loans and mortgages. As the Bank’s key policy rate directly influences lending rates, borrowers could see immediate relief. Homeowners with upcoming mortgage renewals stand to benefit from potentially lower rates, easing some financial pressure in a housing market that has seen rising costs.

Canada’s major banks are likely to adjust their mortgage rates following the central bank’s decision, which may help support the housing market amid slowing economic growth. Many experts believe this cut will help boost consumer spending and investment, which are vital to stimulating the economy.

Despite the positive news on inflation, the Canadian economy continues to face challenges. The labour market, which has shown signs of strain in recent months, remains a key concern. Job creation has slowed, and wage growth has been stagnant, factors that have prompted economists to call for more aggressive measures to stimulate economic activity.

Governor Macklem acknowledged the ongoing challenges but remained optimistic about the future. “If the economy continues to evolve broadly in line with the central bank’s expectations, more interest rate cuts can be expected to boost demand and keep inflation on target,” he noted.