The Bank of Canada delivered an oversized interest rate cut of half a percentage point on Wednesday, picking up the pace of easing borrowing costs.
The central bank’s policy rate now stands at 3.75 per cent. Wednesday’s decision is the fourth consecutive drop in interest rates since June and is the Bank of Canada’s largest rate cut since the global financial crisis in 2009, outside the COVID-19 pandemic.
While the Bank of Canada had proceeded at a more modest pace of quarter-point cuts so far in the easing cycle, the oversized half-point cut was widely expected by economists.
Since the previous interest rate cut in September, inflation has not only returned to the Bank of Canada’s two per cent target but even dropped below it to 1.6 per cent in the most recent reading.
“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,” Bank of Canada governor Tiff Macklem said in prepared remarks.
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At the same time, cracks have formed in the Canadian labour market and growth remains sluggish elsewhere in the economy. Most big bank economists had argued that a 50-basis-point cut was warranted to stimulate growth.
Macklem said that 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 added that the Bank of Canada is taking its decisions one meeting at a time, and will base the future pace of rate cuts on the incoming data.
The Bank of Canada’s final interest rate decision of the year is set for Dec. 11.
CIBC assistant chief economist Avery Shenfeld called the 50-basis-point step a “no-brainer” in a note to clients Wednesday, adding that “it would take a significant turn of events to stand in the way of another cut of that magnitude in December.”
The Bank of Canada’s key rate informs rates that lenders offer on many loans, particularly mortgages. Wednesday’s sizeable interest rate cut offers immediate relief to Canadians with variable rates of interest and bodes well for those with mortgages coming up for renewal.
Macklem said that he expects Wednesday’s rate cut will lead to a boost in spending among both consumers and businesses.
The Bank of Canada’s latest monetary policy report also projects a recovery in home sales and a boost in prices tied to lower interest rates. Declining borrowing costs might also help to get more homes in Canada built, the report noted, but demand is still expected to outpace supply amid persistently tight inventories across the country.
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