Bank of Canada Continues Path toward a 'Neutral' Rate
In a move that surprised some economists, the Bank of Canada announced today a further reduction to its key interest rate. This marks the third consecutive rate cut since June, bringing the total decrease to 3/4 percent from the 5 percent peak.
The central bank justified the decision by citing "continued easing in broad inflationary pressures." This latest cut follows a 2.5% annual inflation rate reported in July, the lowest level since March 2021. The Bank of Canada's Target inflation range is between 2.5 and 1.5 percent, with average inflation of 2 percent.
Bank of Canada Governor Tiff Macklem has been signalling a more accommodating stance in recent months, suggesting that rate cuts would continue as long as inflation remains on a downward trajectory. Given the economic data, today's announcement aligns with this expectation.
The recent string of rate cuts has had the greatest impact on variable-rate mortgages.
However, fixed rates are used to qualify mortgage applicants, and the qualifying mortgage rates have not dropped as much.
While the economy has shown signs of resilience, the central bank is keen to avoid maintaining a tight monetary policy for too long, particularly as global economic uncertainties persist. By lowering interest rates, the Bank of Canada aims to ease the economic brakes and prevent a potential recession.
However, some economists warn that the aggressive rate cuts could fuel inflation in the long run. They argue that a more gradual approach might be necessary to ensure a sustainable economic recovery.
Recession risks persist, and if the Bank of Canada begins to lower rates quickly, it might be perceived as a sign that it is more concerned about a recession than a return of inflation.
As the Bank of Canada continues to navigate the delicate balance between economic growth and price stability, all eyes will be on the central bank's next policy announcement to see if it maintains its current course or adjusts its approach.
The next scheduled date for announcing the overnight rate target is October 23, 2024.
