Bank of Canada Cuts Interest Rate To 4.25%, Signals Potential for Steeper Interest Rate Cuts

The Bank of Canada took a significant step on Wednesday, reducing its key interest rate by 25 basis points to 4.25%, marking the third consecutive cut in its ongoing efforts to manage the country’s economic challenges. As the central bank navigates a delicate economic landscape, it has opened the door to more aggressive rate cuts should the economy face sharper declines in the coming months.

This latest adjustment was widely anticipated by economists, given the central bank’s recent trajectory. Since the easing cycle commenced in June, the benchmark rate has fallen by a total of 75 basis points, reflecting the Bank of Canada’s commitment to addressing economic pressures that could weigh heavily on Canadians.

Bank of Canada Governor Tiff Macklem emphasized the bank’s readiness to make further cuts if inflation continues to trend downward in line with the forecasts made in July. “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate,” Macklem stated during his remarks on Wednesday. He underscored the central bank’s cautious approach, noting, “We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time.”

When pressed on whether a more substantial rate cut of 50 basis points had been considered, Macklem did not provide a direct response but acknowledged that various scenarios, including more aggressive cuts, had been discussed. “We did discuss some different scenarios. Scenarios where it might be appropriate to slow the decline in interest rates… and where it might be appropriate to cut by 50 basis points,” he noted.

The Bank of Canada remains vigilant in monitoring economic conditions, with Macklem indicating that if the economy proves stronger than anticipated or if inflation remains stubbornly high, the central bank may pause its rate-cutting cycle. However, he also left the door open for larger cuts if the economic outlook deteriorates significantly. “If the economy was significantly weaker… yes, it could be appropriate to take a bigger step, something bigger than 25 basis points,” Macklem added.

Inflation, which has been a primary focus of the Bank of Canada’s policy, has shown signs of cooling throughout 2024, with the most recent data in July indicating an annual inflation rate of 2.5%. Despite this progress, the central bank remains cautious, particularly as economic growth in the third quarter may fall short of previous expectations.

Economic analysts have observed a shift in the Bank of Canada’s tone in recent months. The central bank appears to be placing less emphasis on reaching its mandated 2% inflation target and more on the potential weaknesses in the labor market. This shift suggests a growing concern about the broader economic impact of continued rate cuts.

Macklem also highlighted the risks of inflation falling below the target, stressing the need to guard against economic weakness. “With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” he said.

As the Bank of Canada navigates these uncertain waters, it will be closely guided by incoming data and its implications for the inflation outlook. While the central bank anticipates that inflation will continue to ease in the coming months, there is a lingering risk that price pressures could re-emerge later in the year due to the base effect from last year’s declines.

CIBC Chief Economist Avery Shenfeld shared his perspective, predicting that the Bank of Canada might implement two additional 25-basis-point cuts before the year’s end, potentially bringing the policy rate down to 2.5% by next year. Shenfeld also noted that if economic indicators, particularly inflation and job data, weaken further, the central bank might opt for a “bolder pace of easing” to stabilize the economy.

In conclusion, the Bank of Canada’s recent rate cut reflects its cautious yet responsive approach to the evolving economic landscape. With the potential for more significant rate cuts on the horizon, Canadians are left to watch closely as the central bank navigates these complex economic challenges.