In its third consecutive cut since June, the Bank of Canada lowered its key interest rate to 4.25 per cent on Wednesday, citing the continued easing of inflation.
While the move was widely anticipated by economists, the gradual pace of cuts has sparked some questions about when a more dramatic move might be made.
“If we need to take a bigger step, we’re prepared to take a bigger step,” Bank of Canada governor Tiff Macklem said during a news conference Wednesday. “At this point, 25 basis points looked appropriate.”
The decision Wednesday followed a pattern established earlier this summer when rates were cut to 4.75 per cent in June and 4.5 per cent in July.
Macklem said the decision took into consideration the risks that could affect inflation rates. Prices for housing and shelter, as well as some other services, are still maintaining upward pressure on inflation, he said, adding that since their July rate cut, those upward forces “have eased slightly.”
“At the same time, downward pressure coming from excess supply in the economy remains,” he said. “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts.”
Macklem’s comments Wednesday echo those he made in July. Canada’s annual inflation rate dropped to 2.5 per cent in July, down from 2.7 per cent in June, Statistics Canada said in August. It’s the lowest it has been since March 2021, when inflation began to climb amid pandemic pressures and supply disruptions.
Some economists hoping for bigger cuts
Although a quarter point reduction was expected, experts had estimated there could be a small chance the bank would make a more dramatic cut of 50 basis points.
When asked if a cut of that magnitude had been debated, Macklem said numerous scenarios were discussed, but there was a “strong consensus” for the cut they made. If they find inflation is “significantly weaker than expected,” a bigger step could be appropriate, he added.
“We will take our decisions based on the data we have.”
Some experts say Wednesday’s move isn’t ambitious enough to jump-start the economy.
“The Bank of Canada went with the more cautious approach of yet another quarter point rate cut, leaving rates still well above where they will have to head to get the economy really moving again now that inflation is less of a threat,” Avery Shenfeld, an economist at CIBC Economics, said in a note to clients.
Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, said that Wednesday’s announcement lacked a “clear path for rates” but added that the policy will likely clarify over the next few meetings “to support economic growth.”
The cuts to the key interest rate seen in recent months are a change from nearly a year of stagnancy. Prior to June’s cut, the rate had been held at five per cent since July 2023. It reached five per cent after an aggressive campaign of rate hikes that the bank embarked on in April 2022 with the goal of tackling high inflation.
The central bank will release its next full outlook for the economy and inflation in its monetary policy report on Oct. 23.