(Bloomberg) -- The Bank of Canada stepped up the pace of interest-rate cuts and signaled that the post-pandemic era of high inflation is over.
Policymakers led by Governor Tiff Macklem lowered the benchmark overnight rate to 3.75% on Wednesday, the biggest reduction in borrowing costs since March 2020 during the early days of the pandemic.
The jumbo cut — expected by markets and economists in a Bloomberg survey — aims to boost economic growth and keep inflation close to the 2% target. Headline price pressures slowed to 1.6% in September and are no longer as broad, with inflation expectations now trending closer to normal.
“All this suggests we are back to low inflation,” Macklem said in his prepared opening remarks. “Now our focus is to maintain low, stable inflation. We need to stick the landing.” The bank now sees upward and downward risks to its inflation projection as “reasonably balanced,” he added.
Officials reiterated that they expect to reduce the policy rate further if the economy evolves in line with their expectations, but they cautioned that the “timing and pace” of future cuts will be based on incoming data.
The loonie fell to a session low of C$1.3853, its weakest mark since early August, after the decision. Short-term Canadian debt rallied, outperforming US Treasuries and pulling the two-year Canada benchmark yield briefly below 3%.
The Bank of Canada’s latest forecasts see policymakers achieving a so-called soft landing, where inflation normalizes without a deep economic downturn. Gross domestic product growth, which is expected to be just 1.2% this year, should accelerate next year to just over 2%, while inflation is expected to remain near the midpoint of the 1% to 3% target range, the central bank said.
“We want to see growth strengthen. Today’s interest rate decision should contribute to the pickup in demand,” Macklem said. “We took a bigger step today because inflation is now back to the 2% target and we want to keep it close to the target.”
In a news conference, Macklem said there was a “clear consensus” among policymakers to cut by 50 basis points. The jumbo cut suggests a new phase of monetary policy easing, where policymakers focus on returning interest rates to more neutral levels — where borrowing costs neither restrict nor stimulate growth — to avoid slowing the economy too much and having inflation undershoot the target.
“An outsized rate cut was a no-brainer, and the simple message from the Bank of Canada is that there’s more to come if events unfold as expected,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a note to investors. “While the Bank sees better times ahead in the next two years, with growth averaging 2.2%, that isn’t by any means ruling out further interest rate relief, as softer monetary conditions are cited as the driver for the improvement.”
Soft Labor Market
The Bank of Canada started easing borrowing costs with a quarter percentage-point reduction in June. It cut again by 25 basis points at each meeting in July and September. The next and final rate decision for this year is on Dec. 11, when some economists have already projected another 50 basis-point cut.
Royce Mendes, managing director and head of macro strategy at Desjardins Securities, said the necessary ingredients aren’t yet there for a follow-up jumbo-sized cut.
“With the level of rates starting from a now lower level and the American economy on stronger footing, the Bank of Canada might want to return to 25 basis-point moves as it assesses the impact of recent monetary easing,” he said in a report to investors.
Before the release, traders in overnight swaps were betting the Bank of Canada would lower its policy rate to about 2.75%, the mid-point of the so-called neutral range, by September 2025.
In the monetary policy report accompanying the rate statement, the bank said headline inflation will remain close to the 2% target through 2026, with core measures of consumer prices easing gradually. The upward inflationary pressures from shelter and services are also forecast to further diminish.
While economic growth in the second quarter was slightly stronger than July’s forecast, the third quarter appears to be weaker, the report said. The bank said the economy continues to be in excess supply — wherein there isn’t enough demand for goods and services being produced — and the labor market is still soft, with population increases exceeding job creation.
Growth is expected to accelerate and average 2.25% over 2025 and 2026. Consumer spending and business investment are forecast to strengthen, supported by interest-rate decreases. Population growth is also expected to slow due to Prime Minister Justin Trudeau’s measures to curb inflows of newcomers.
--With assistance from Jay Zhao-Murray and Carter Johnson.
(Adds comment from news conference in paragraph nine.)
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