cruising back towards neutral

The Bank of Canada reduced its policy rate today—notably though not unsurprisingly by 50 basis points—to 3.75%. In its release the Bank observed “The Bank expects inflation to remain close to the target over the projection horizon, with the upward and downward pressures on inflation roughly balancing out. The upward pressure from shelter and other services gradually diminishes, and the downward pressure on inflation recedes as excess supply in the economy is absorbed”.

The so-called “jumbo cut” brought the trend-setting rate to its lowest level since November 2022. While the Bank has further to go in order to get within its desired range of 2.25-3.25% (where it deems monetary policy to be neither restrictive nor expansionary), today’s cut brings it much closer to so-called “neutral”. With inflation below target at 1.6%, the Bank sees evidence of slack in the economy as demand has cooled. Further, there is evidence that inflation is actually lower than it appears, due to rent inflation readings not yet capturing stagnating (and in places, declining) rental rates in Canada. And even though the unemployment rate didn’t rise last month, the labour market remains weak overall.

All of this reinforces not just the need for today’s jumbo rate cut, but also further reductions in the Bank’s policy rate in the months ahead. The next rate announcement will be on December 11th, where we expect at least a 25-point reduction.