The Bank of Canada made a sizable cut to its key lending rate Wednesday from 4.25 per cent to 3.75 per cent as the global economy continues to expand.
The half percentage point cut is the fourth rate cut in a row by the central bank as inflation dropped from 2.7 per cent in June to 1.6 per cent in September.
“We took a bigger step today because inflation is now back to the 2 per cent target and we want to keep it close to the target,” Governor of the Bank of Canada Tiff Macklem said in a statement.
The central bank is expecting inflation to stay around 2 per cent in October as its surveys suggest business and consumer expectations of inflation have shifted downward and are approaching normal levels.
Macklem says the decline in inflation over the last few months reflects the combined effects of lower oil prices, a dip in shelter price inflation in Canada and lower prices for several consumer goods like cars and clothes.
If the trend continues, Macklem expects more interest rate cuts in the future.
“Now, our focus is to maintain low, stable inflation,” said Macklem. “We need to stick the landing.”
Even before the rate cut was announced, Finance Minister and Deputy Prime Minister Chrystia Freeland took a victory lap on the positive economic numbers while speaking to reporters.
“The IMF (International Monetary Fund) published today its World Economic Outlook, and in that outlook, Canada is forecast by the IMF to have the strongest economic growth in the G7 in 2025. There is a lot more we need to do. But on the macroeconomic front, we’re seeing some solid progress,” said Freeland.
The Bank of Canada expects the global economy to expand at a rate of about 3 per cent over the next two years with growth in the United States expected to be stronger than previously forecast.
“Household spending and business investment have picked up this year, but remain soft,” Macklem told reporters.
The central bank also notes financial conditions across the world have eased and global oil prices are about ten dollars lower than predicted in the July monetary policy report.
According to the bank, the Canadian economy grew by around 2 per cent in the first half of the year and is expected to grow by 1.75 per cent in the second half of 2024. Exports in Canada have also been boosted by the opening of the Trans Mountain Expansion pipeline.
But it’s not all good news. The central bank notes the Canadian labour market remains soft as the unemployment rate rose to 6.5 per cent in September, a full percentage point higher year over year.
“Business hiring has been weak, which has particularly affected young people and newcomers to Canada,” said Macklem, adding the number of workers has increased faster than the number of jobs.
According to the bank, GDP growth is expected to gradually strengthen to about 2 per cent in 2025 and 2.25 per cent in 2026 as a result of lower interest rates.