The Bank of Canada has lowered its key interest rate by 50 basis points to 3.75%, responding to signs of easing inflation and a slowing economy. This marks the first significant cut in four years, signaling an end to the central bank’s period of aggressive inflation control.
Inflation dropped to 1.6% in September, falling below the 2% target the bank had been striving for when it raised rates to a 20-year high.
The Governor of the Bank of Canada, Tiff Macklem, stated that the economy is moving towards more stable conditions, and the reduction in inflation is positive for both consumers and businesses.
He acknowledged that the high inflation period was difficult but affirmed that the monetary policy had been effective, enabling to losen control over interest rates.
Despite three prior cuts in borrowing costs, economic activity in Canada remains sluggish. Consumers are curbing their spending, businesses are experiencing a decline in sales, and the country’s GDP growth is stalling.
Economic growth in July was a mere 0.2%, with preliminary data for August indicating that the outlook is unlikely to improve in the near future.
The Bank of Canada’s rate cut aims to boost demand and stimulate economic activity. Economists suggest that the central bank may continue to lower rates if there is no significant improvement in economic data. Markets are already anticipating another possible 50 basis point cut in December.
Financial experts emphasize that the Bank of Canada's actions will be guided by incoming economic data. If inflation and economic growth remain at their current levels, further monetary easing may be on the horizon.
However, as Tiff Macklem pointed out, this will depend on how well the economy performs relative to expectations. He also added that the main priority is maintaining inflation around 2% to support a sustainable economic recovery.
Following these developments, the Canadian dollar dropped by 0.15%, and two-year government bond yields fell after the rate decision was announced.
The Bank of Canada’s economic forecast has been revised upward. GDP growth for the third quarter of 2024 is now projected at 1.5%, a notable decrease from the 2.8% estimate in July. However, the full-year forecast for 2024 remains steady at 1.2%.
Inflation projections have also been adjusted, with inflation expected to reach 2.2% in 2025 and 2.0% in 2026, aligning with the central bank’s long-term targets.
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