Bank of Canada Lowers Interest Rate, Signals Further Cuts Expected
The Bank of Canada has once again reduced its policy interest rate, signaling a continued commitment to easing monetary policy. Following three consecutive cuts, the rate now stands at 4.25 per cent, marking the third time in a row the central bank has taken this action, an unprecedented move since the first quarter of 2009 during the global financial crisis. This decision reflects a growing concern over a weakening economic picture and a desire to bolster economic growth.
The Bank’s action follows an assessment of opposing forces – the risk of further economic contraction versus the potential for growth. Canada’s Gross Domestic Product (GDP) beat the bank’s initial forecast for the second quarter with growth of 2.1 per cent, but subsequent figures for June and an early estimate for July showed stagnation. The unemployment rate has risen to 6.4 per cent, and hiring remains subdued. The Bank emphasizes the need for economic expansion to absorb excess demand and return inflation to the target of two per cent.
The central bank’s current strategy centers on managing these opposing forces. Inflation, measured at 2.5 per cent in July, remains elevated, with core inflation averaging around the same level. Shelter inflation, which is heavily influenced by interest rates, continues to be a key concern. While shelter inflation is beginning to decrease, the Bank acknowledges the need for further declines to achieve the inflation target.
Economists predict continued rate cuts throughout the remainder of 2023 and into 2025, with the interest rate potentially falling to between 2.25 and 3.25 per cent by the end of next year. This projection is based on the anticipated deterioration of the economic outlook, with GDP growth forecast to be 2.8 per cent in the third quarter, which is lower than the Bank of Canada’s July projection. The continued slowdown in hiring and the elevated unemployment rate further support the expectation of additional easing.
Bank of Canada Governor Tiff Macklem highlighted the need to assess data as it becomes available and stated that the Bank would be prepared to take “bigger steps” if necessary. While a 50 basis point cut wasn’t ruled out, the current indication is for a 25 basis point reduction. Macklem emphasized the significance of returning inflation to the two per cent target, asserting that further rate cuts will be dependent on a reduction in shelter prices.
Several economists, notably Claire Fan of the Royal Bank of Canada, anticipate further rate cuts, predicting a fall to between 2.25 and 3.25 per cent by the end of 2025. David Rosenberg, founder of Rosenberg Research, echoed this sentiment, citing the shaky foundation of the Canadian economy and the potential for contraction without a population boom. Economists believe that as the economic picture worsens, the Bank of Canada is likely to maintain its course of cutting interest rates over the coming months.
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