The Bank of Canada once again reduced its policy rate today, to 3.25%. This was the fifth consecutive interest rate announcement in which the Bank opted to cut its policy rate and the second consecutive 50 basis point “jumbo cut”. In its release the Bank noted “With inflation around 2%, the economy in excess supply, and recent indicators tilted towards softer growth than projected, Governing Council decided to reduce the policy rate by a further 50 basis points to support growth and keep inflation close to the middle of the 1-3% target range”.
Further, in its summary deliberations from its October announcement the Bank’s governors discussed that “since a 50-basis-point cut is unusual, some members expressed concern that it might be interpreted as a sign of economic trouble, leading to expectations of further moves of this size or to assumptions that the policy interest rate would need to become very accommodative in the future. Governing Council members wanted to convey that a larger step was appropriate given the economic data seen since July”. This message applies again today, with inflation right on the Bank’s target of 2.0% and the labour market continuing to show weakness, conditions are ripe for a policy rate that is no longer restrictive. Today’s cut brings the policy rate to the upper end of the Bank’s desired neutral range of 2.25-3.25%—where it deems monetary policy to be neither restrictive nor expansionary.
The next interest rate announcement is on January 29th, and there will likely be a need for further rate cuts in the early part of next year. There will be plenty of new information for the Bank to consider between now and then, including two more consumer price index releases. Based on where everything sits today, another reduction in January is likely.
