On October 23, 2024, the Bank of Canada announced a significant reduction in its key benchmark interest rate, cutting it by 50 basis points to 3.75 percent. This was the largest rate cut in over four years and marks the fourth consecutive rate reduction by the central bank since June. The move comes as inflation in Canada has dropped significantly, with the September rate falling to 1.6 percent, below the Bank of Canada’s target of 2 percent.
This announcement signifies a turning point in the Bank’s aggressive efforts to combat rising inflation, which had reached a 20-year high due to global economic disruptions. The Bank of Canada, led by Governor Tiff Macklem, raised interest rates several times in response to the surging inflation, but the recent cuts suggest that the central bank believes its efforts to stabilize prices have been successful.
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In a press conference following the announcement, Macklem expressed optimism about the economy’s progress. “Canadians can breathe a sigh of relief. It’s a good news story,” he stated, emphasizing that the measures taken to control inflation have yielded positive results. “It’s been a long fight against inflation, but it’s worked, and we’re coming out the other side,” he added.
Despite the consecutive rate cuts, Canada’s economy has been slow to rebound. Businesses have reported sluggish sales, consumer sentiment remains weak, and demand has not picked up as expected. This economic softness has hindered growth, raising concerns about the effectiveness of rate cuts in stimulating economic activity.
Governor Macklem acknowledged these concerns, stating, “Today’s interest rate decision should contribute to a pickup in demand.” He emphasized the importance of strengthening economic growth, expressing hope that the latest rate cut would encourage more consumer spending and business investment.
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This decision by the Bank of Canada aligns with a broader trend among central banks worldwide, as many are shifting from raising interest rates to cutting them in an effort to support economic recovery. The United States Federal Reserve, for example, recently began its own rate reduction cycle, making a similar-sized cut to its benchmark rate. The global financial community is watching closely to see how these rate changes impact economic growth and inflation in various countries.
Many economists and financial analysts believe that the Bank of Canada may not be done cutting rates. Some are predicting that another significant reduction could be on the horizon, potentially as soon as December. Avery Shenfeld, Chief Economist at CIBC, noted, “Based on the logic offered to justify today’s decision, it would take a significant turn of events to stand in the way of another cut of that magnitude in December.”
The potential for further rate cuts reflects the Bank of Canada’s commitment to maintaining low and stable inflation while balancing the need for economic growth. Governor Macklem highlighted the importance of this balance, stating, “Now our focus is to maintain low, stable inflation. We need to stick the landing.
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Money markets are already pricing in the likelihood of another rate cut during the final monetary policy decision announcement of the year, scheduled for December 11. While there is a strong expectation of a 25-basis-point cut, some analysts believe there is a more than 25 percent chance that the Bank could opt for another 50-basis-point reduction.
However, a larger cut in December is not guaranteed. Kyle Chapman, a forex markets analyst, remarked, “Another 50 [basis points] in December is not a slam dunk. It will depend on where the Bank of Canada thinks neutral is.” The concept of the neutral rate—where monetary policy neither restricts nor accelerates growth—plays a crucial role in the Bank’s decision-making process. The central bank currently estimates the neutral rate to be between 2.25 percent and 3.25 percent.
Looking ahead, Macklem reiterated that if economic conditions continue to align with forecasts, the Bank of Canada will likely implement additional rate cuts. However, the timing and pace of these cuts will depend on the latest economic data. The central bank remains focused on ensuring that inflation remains stable around the 2 percent target, as this is essential for the economy’s overall health.
Canada’s economic growth has been stifled by the high borrowing costs resulting from earlier interest rate hikes. In July, the country’s gross domestic product (GDP) grew by just 0.2 percent on a monthly basis, and provisional data suggest that August’s growth may have stalled entirely. The Bank of Canada has revised its growth forecast downward, now predicting an annualized GDP growth of 1.5 percent for the third quarter, a significant drop from the 2.8 percent growth forecasted in July.
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Despite the weaker-than-expected growth in the third quarter, the Bank has maintained its full-year forecast for GDP growth at 1.2 percent. The central bank remains cautiously optimistic that the economy will gradually regain momentum as inflation stabilizes and borrowing costs decrease.
In its latest Monetary Policy Report (MPR), released alongside the interest rate announcement, the Bank of Canada provided updated projections for inflation and economic growth. The report anticipates that inflation will average 2.5 percent in 2024, falling to 2.2 percent in 2025 and returning to the 2 percent target by 2026.
While the Bank is encouraged by the recent decline in inflation, it remains vigilant about potential risks that could push inflation higher or lower than expected in the coming years. Governor Macklem emphasized that the central bank will continue to closely monitor inflation trends, as maintaining price stability is crucial for the Canadian economy’s long-term health. “The economy functions well when inflation is around 2 percent,” he said, reiterating the importance of keeping inflation within the target range.
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As the Bank of Canada navigates the delicate balance between stimulating economic growth and maintaining low inflation, the coming months will be critical. The central bank’s actions will be closely watched by economists, businesses, and consumers alike, as further rate cuts could provide much-needed relief to borrowers and potentially reinvigorate economic activity.
At the same time, the Bank must ensure that inflation does not fall too far below target, as excessively low inflation can also pose challenges for the economy. The central bank’s primary goal is to achieve a sustainable recovery while keeping inflation in check, and the decisions made in the coming months will play a key role in shaping Canada’s economic future.
the Bank of Canada’s decision to cut interest rates by 50 basis points is a clear signal that the central bank is confident in its fight against inflation. However, the slow pace of economic growth suggests that more work remains to be done to stimulate demand and strengthen the economy. As the central bank prepares for its next monetary policy decision in December, all eyes will be on the data to determine whether another significant rate cut is on the horizon.
