Bank of Canada cuts interest rates, fighting against inflation

On Wednesday, the Bank of Canada lowered its key benchmark rate by 50 basis points to 3.75 percent, marking its first significant cut in over four years. The central bank pointed to indications that Canada has entered a period of low inflation.

Canada cuts interest rates

The country’s central bank, which raised rates to a 20-year high to combat rising prices, has now reduced benchmark rates for the fourth consecutive time since June. In September, inflation dropped to 1.6 percent, falling below the 2 percent target.

“Canadians can breathe a sigh of relief. It’s a good news story,” Bank of Canada (BoC) Governor Tiff Macklem said during a press conference after the rate announcement. “It’s been a long fight against inflation, but it’s worked, and we’re coming out the other side.”

Despite three previous cuts totaling 75 basis points, demand has been muted, sales at businesses are sluggish and consumer sentiment is tepid, hurting economic growth.

“Today’s interest rate decision should contribute to a pickup in demand,” Macklem said, adding that the BoC would like to see growth strengthen.

The United States Federal Reserve last month started its own rate reduction cycle with a similar-sized move.

Maintain low, stable inflation

The last time the Bank of Canada reduced interest rates by 50 basis points during a scheduled meeting was in March 2020.

The September inflation rate of 1.6 percent highlighted concerns that the elevated borrowing costs may have dampened price increases more than necessary for the economy.


"Right now, our priority is to maintain low, stable inflation. We need to ensure a smooth transition," Macklem stated.

Money markets are fully anticipating a 25-basis-point cut in the final monetary policy decision announcement of the year on December 11. They also estimate a greater than 25 percent likelihood of an additional 50-basis-point cut.

“Another 50 basis points in December isn't guaranteed; it will depend on the Bank of Canada's view of the neutral rate,” said Kyle Chapman, a forex markets analyst at Ballinger Group.

The central bank has indicated that it considers the neutral rate—where monetary policy neither restricts nor stimulates growth—to be between 2.25 percent and 3.25 percent.

Macklem emphasized that if the economy continues to align with forecasts, the bank will cut rates again, with the timing and pace contingent on the most recent data.

Canada’s Economic Growth Stalls Amid High Interest Rates

Canada’s economic growth has faltered due to high interest rates. In July, the gross domestic product (GDP) increased by only 0.2 percent month-over-month, and early data indicate that growth in August is likely to stagnate.

In its latest monetary policy report (MPR), released alongside the rate announcement on Wednesday, the bank revised its growth forecasts.

It now anticipates annualized GDP growth of 1.5 percent for the third quarter, down from the previously predicted 2.8 percent in July, while maintaining its full-year forecast at 1.2 percent.

The overall annual inflation rate for this year is projected to be 2.5 percent, declining to 2.2 percent in 2025 and reaching 2 percent in 2026, according to the MPR.

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