The Bank of Canada delivered a supersized interest rate cut Wednesday in response to the recent decline in inflation, bringing its key policy rate down by half a percentage point.
With annual price growth now around two per cent, the central bank says its job has shifted from lowering inflation to maintaining it around the inflation target.
“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,” Governor Macklem said in his opening statement.
Canada’s inflation rate fell to 1.6 per cent in September, solidifying forecasters’ expectations for a larger rate cut. Bigger cuts mean the rate can be lowered faster.
Wednesday marked the central bank’s fourth consecutive interest rate cut since June. Its policy rate now stands at 3.75 per cent, down from a height of five per cent.
The Bank of Canada attributes the slowdown in price growth to shelter price inflation easing, supply outpacing demand in the economy and global oil pricing falling.
It’s now forecasting inflation will remain around the two per cent target throughout its projection horizon, which extends to 2026.
High interest rates have sent a chill through the Canadian economy, slowing growth and loosening the labour market.
The central bank says in its monetary policy report that while layoffs have remained stable, businesses have pulled back on hiring, which has disproportionately affected young people and newcomers.
As interest rates continue to come down, the Bank of Canada is projecting economic growth to pick back up in 2025 and 2026.
Macklem said the central bank expects cutting its key interest rate further, so long as the economy evolves in line with its forecast.
“High inflation and interest rates have been a heavy burden for Canadians. With inflation now back to target and interest rates continuing to come down, families, businesses and communities should feel some relief,” Macklem said.
