Bank of Canada ‘justified’ in a half-point rate cut – here’s why

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After making modest 25-basis-point cuts in the first three reductions of its interest rate cycle, many economists expect the Bank of Canada to take a more significant step down in its decision on Wednesday.

The central bank’s policy rate currently stands at 4.25 per cent, following a quarter-point cut earlier in September.

However, much has shifted in Canada’s economic landscape since then.

One major factor is that inflation appears well under control, dropping from a precise aim at the Bank of Canada’s two per cent target to 1.6 per cent in the most recent data.

Tiff Macklem, governor of the central bank, has emphasised in recent speeches that the Bank is just as concerned about inflation falling too far below two per cent as it is about inflation staying too high.

Although Macklem had previously cautioned that there might be “bumps” on the road to reaching the price stability target, inflation has been tamed more quickly than initially forecast. Earlier predictions had suggested inflation would return to two per cent sometime in 2025.

Randall Bartlett, senior director of Canadian economics at Desjardins, told Global News that he does not expect inflation to fall much further in the coming months, noting that September’s sharp decrease in fuel prices is unlikely to recur.

50 basis points… or more?

Bartlett also notes that other economic indicators, including the country’s economic output, are falling short of the Bank of Canada’s expectations.

The central bank’s most recent projections from July anticipated real gross domestic product (GDP) growth of 2.8 per cent in the third quarter of the year. However, according to Desjardins’ analysis, actual results are closer to 1.5 per cent.

Aside from solid job gains in the September report, Canada’s labour market has shown signs of strain over the summer, with the unemployment rate briefly rising to a seven-year high, excluding the pandemic.

If the Bank of Canada opts for a 50-basis-point cut, it would mark the first time in over 15 years that such a large reduction has occurred, outside of the pandemic period.