The Bank of Canada lowered its key interest rate by 25 basis points on Wednesday and opened the door to bigger cuts if the economy slows more sharply in the months ahead.
The third consecutive rate cut was widely expected by economists and brings the central bank’s benchmark interest rate to 4.25 per cent.
The policy rate, which widely sets the cost of borrowing across Canada and informs the rates many Canadians get on mortgages and other loans, has fallen 75 basis points since the easing cycle began in June.
“If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate,” Bank of Canada governor Tiff Macklem said in prepared remarks Wednesday.
“We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time.”
Asked Wednesday whether the central bank debated a steeper cut of half a percentage point, Macklem did not answer directly, but he did not rule out a change of pace moving forward.
“We did discuss some different scenarios. Scenarios where it might be appropriate to slow the decline in interest rates… and where it might be appropriate to cut by 50 basis points,” he said.
Macklem explained that if the economy proves stronger than anticipated and inflation more stubborn, the Bank may pause its easing cycle at a future decision. But he added that if the economy “was significantly weaker … yes, it could be appropriate to take a bigger step, something bigger than 25 basis points.”
Annual inflation has continued to cool through 2024, last coming in at 2.5 per cent in July.
Macklem’s statement Wednesday acknowledged that the Bank of Canada’s calls for a pickup in third-quarter economic growth might now be ambitious, with risks that uptick might be weaker than thought at the central bank’s latest forecasts in July.
Economists and market watchers have noted a tone shift from the Bank of Canada in recent months: downplaying concerns that it won’t hit its mandated two per cent target and instead focusing on deterioration in the labour market.
Macklem also reiterated in his comments Wednesday that the central bank is as worried about inflation dipping below two per cent as it is stalling above the target.
“With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” he said.
Macklem said the Bank of Canada’s governing council would be “guided by incoming information” and the projected impacts on the inflation outlook in deciding the future path for interest rates.
While the Bank of Canada is expecting inflation to ease further in the months ahead, Macklem’s commentary noted a risk that price pressures may “bump up later in the year,” largely the result of the previous year’s drops falling out of the annual comparison.
CIBC chief economist Avery Shenfeld said in a note to clients Wednesday morning that he is expecting two more 25-basis-point interest rate cuts at the Bank of Canada’s remaining decisions in 2024, en route to a policy rate of 2.5 per cent next year.
He noted that if inflation or jobs data comes in particularly weak over the coming months, the central bank may take oversized steps as part of a “bolder pace of easing.”