Bank of Canada cuts interest rates, says fight against inflation ‘worked’

The cut on Wednesday, the fourth in a row, was bigger than expected as September inflation sank below target.

Bank of Canada Governor Tiff Macklem takes part in an event at the Bank of Canada in Ottawa, Canada
Bank of Canada Governor Tiff Macklem takes part in an event at the Bank of Canada in Ottawa, Canada, October 7, 2021 [Blair Gable/Reuters]

The Bank of Canada on Wednesday reduced its key benchmark rate by 50 basis points to 3.75 percent, its first bigger-than-usual move in more than four years, and hailed signs that Canada has returned to an era of low inflation.

The country’s central bank, which hiked rates to a 20-year high to fight soaring prices, has now cut benchmark rates four times in a row since June. Inflation in September sank to 1.6 percent, below the 2 percent target.

“Canadians can breathe a sigh of relief. It’s a good news story,” Bank of Canada (BoC) Governor Tiff Macklem said during a press conference after the rate announcement. “It’s been a long fight against inflation, but it’s worked, and we’re coming out the other side.”

Despite three previous cuts totaling 75 basis points, demand has been muted, sales at businesses are sluggish and consumer sentiment is tepid, hurting economic growth.

“Today’s interest rate decision should contribute to a pickup in demand,” Macklem said, adding that the BoC would like to see growth strengthen.

The United States Federal Reserve last month started its own rate reduction cycle with a similar-sized move.

Economists and analysts now see a possibility of another jumbo cut building up in December.

“Based on the logic offered to justify today’s decision, it would take a significant turn of events to stand in the way of another cut of that magnitude in December,” CIBC Chief Economist Avery Shenfeld wrote in a note.

‘Maintain low, stable inflation’

The last time the Bank of Canada cut rates by 50 basis points at a scheduled meeting was in March 2020.

The headline September inflation rate of 1.6 percent underscored concerns that the high cost of borrowing might have suppressed the rise in prices more than the economy needed.

“Now our focus is to maintain low, stable inflation. We need to stick the landing,” Macklem said.

Money markets are fully pricing in a 25-basis-point cut in the final monetary policy decision announcement of the year on December 11. They are seeing an over 25 percent chance of another 50-basis-point cut.

“Another 50 [basis points] in December is not a slam dunk. It will depend on where the BoC thinks neutral is,” said Kyle Chapman, forex markets analyst at Ballinger Group.

The central bank said it sees the neutral rate – where the monetary policy is not considered to be restricting growth but also accelerating growth – between 2.25 percent and 3.25 percent.

Macklem reiterated that if the economy continues to evolve broadly in line with forecasts, the bank would cut rates again, with the timing and pace depending on the latest data.

Canada’s economic growth has sputtered under the impact of high rates. July gross domestic product (GDP) grew by just 0.2 percent on a monthly basis and provisional data suggest August growth will likely stall.

The bank revised its forecast for quarterly and annual growth in its latest monetary policy report (MPR) released along with the rates announcement on Wednesday.

It now expects annualised GDP growth in the third quarter to be 1.5 percent, down from the 2.8 percent it predicted in July, but kept its full-year forecast unchanged at 1.2 percent.

The overall annual inflation rate this year is seen at 2.5 percent, falling to 2.2 percent in 2025 and 2 percent in 2026, the MPR showed.

The bank, however, is still concerned about inflation coming in higher or lower than expected going forward. “The economy functions well when inflation is around 2 percent,” Macklem said.

Source: Reuters

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