As the Canadian economy sputters, the Bank of Canada says it’s here to help.
The bank announced Wednesday that it’s cutting its key overnight interest rate by 50 basis points — a half percentage point, and double what it’s done in previous decisions.
That brings the overnight rate to 3.75 per cent. The goal? Getting consumers spending, and businesses investing.
It could also spark some life in the real estate market. Even the Bank, in a press release, said residential investment is expected to rise as “strong demand for housing lifts sales” and spending on renovations picks up
The bank had already cut the overnight rate by 25 basis points three straight times, from a high of five per cent.
“We took a bigger step today because inflation is now back to the two per cent target and we want to keep it close to the target,” said Bank of Canada governor Tiff Macklem.
With inflation below the bank’s target, said Macklem, the bank is now hoping to spur consumer and business spending by lowering the cost of borrowing money.
“Household spending and business investment have picked up this year, but remain soft. This softness has helped take the remaining steam out of inflation,” Macklem said. “But with inflation back to two per cent, we want to see growth strengthen. Today’s interest rate decision should contribute to a pickup in demand.”
Real estate and mortgage experts said the bigger cut could also boost activity in the housing market, which has been treading water for much of the year.
Leah Zlatkin, licenced mortgage broker and LowestRates.ca expert, believes the rate cut could be the catalyst that motivates homebuyers to enter the real estate market, especially in Toronto, where affordability remains a significant barrier.
In a press conference after the announcement, Macklem said the bank is now firmly on a cutting path, but refused to be pinned down on whether the bank will make another 50-point cut at its meeting in December.
“I’m not going to handicap the next move. I’ve been pretty clear on the direction,” said Macklem. “The timing and the pace is going to depend on the data and what we see … We’re going to take our December decision in December.”
That didn’t stop some economists from predicting the bank will have no choice but to follow up with another 50-point cut, saying the economy is so weak it needs a shot of fiscal adrenalin.
“Their updated economic projections do look very optimistic to us. Should our forecast for a continued sluggish economy materialize, a follow-on 50 basis point rate cut in December should be viewed as the overwhelmingly likely outcome,” a team of National Bank economists wrote after the announcement.
The bank also unveiled its latest Monetary Policy Report — a quarterly look at the Canadian and global economies.
The MPR sees the Canadian economy growing at an anemic rate of 1.2 per cent this year, before rebounding to 2.1 per cent next year and 2.4 per cent in 2026.
CIBC chief economist Avery Shenfeld also predicted the bank will likely make another large cut in December.
“There’s no real logic in taking baby steps toward getting interest rates to a level that won’t needlessly hold back economic growth,” Shenfeld wrote. “It would take a major turn of events to stand in the way of another 50 basis point reduction in December.”
Macklem also noted the unemployment rate has been rising, and has hit younger workers and new Canadians particularly hard.
“Job layoffs have remained modest but business hiring has been weak, which has particularly affected young people and newcomers to Canada. Simply put, the number of workers has increased faster than the number of jobs,” Macklem said.
In a research note after the announcement, TD economist James Orlando said the bank had no choice but to make the 50-basis-point cut.
“The central bank is set on doing what it can to boost economic growth. Will a 50 bp move achieve this? Probably not, but the central bank felt it should do something with economic data continuing to show that the country is stuck in a rut,” Orlando wrote.
The bank raised rates 10 times between March 2022 and last summer in a bid to wrestle inflation down to its two per cent target. Inflation peaked at 8.1 per cent in June 2022 as the Canadian economy opened back up from COVID-related restrictions. In September, Canada’s annual rate of inflation fell to 1.6 per cent, from two per cent the previous month.
The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving down prices and slowing the economy.
Now, as the economy slows and inflation has been heading mostly downward, the Bank is taking the reverse approach, trying to stimulate growth by cutting rates.
With files from Clarrie Feinstein
