Bank of Canada cuts key interest rate to 4.25%, citing cooling inflation

In its third consecutive cut since June, the Bank of Canada lowered its key interest rate to 4.25 per cent on Wednesday, citing the continued easing of inflation.

While the move was widely anticipated by economists, the gradual pace of cuts has sparked some questions about when a more dramatic move might be made.

"If we need to take a bigger step, we're prepared to take a bigger step," Bank of Canada governor Tiff Macklem said during a news conference Wednesday. "At this point, 25 basis points looked appropriate."

The decision Wednesday followed a pattern established earlier this summer when rates were cut to 4.75 per cent in June and 4.5 per cent in July.

Macklem said the decision took into consideration the risks that could affect inflation rates. Prices for housing and shelter, as well as some other services, are still maintaining upward pressure on inflation, he said, adding that since their July rate cut, those upward forces "have eased slightly."

"At the same time, downward pressure coming from excess supply in the economy remains," he said. "If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts."

Macklem's comments Wednesday echo those he made in July. Canada's annual inflation rate dropped to 2.5 per cent in July, down from 2.7 per cent in June, Statistics Canada said in August. It's the lowest it has been since March 2021, when inflation began to climb amid pandemic pressures and supply disruptions.

While inflation is approaching the twoper cent target that the Bank of Canada aims for, the economy still has a way to go.

"The runway's in sight, but we have not landed it yet," Macklem said.

Some economists say bigger cuts needed

Although a quarter-point reduction was expected, some experts had estimated there was a small chance the bank would make a more dramatic cut of 50 basis points.

When asked if a cut of that magnitude had been debated, Macklem said numerous scenarios were discussed, but there was a "strong consensus" for the cut they made. If they find inflation is "significantly weaker than expected," a bigger step could be appropriate, he added.

"We will take our decisions based on the data we have."

Some experts say Wednesday's move isn't ambitious enough to jump-start the economy.

"The Bank of Canada went with the more cautious approach of yet another quarter point rate cut, leaving rates still well above where they will have to head to get the economy really moving again now that inflation is less of a threat," Avery Shenfeld, an economist at CIBC Economics, said in a note to clients.

The cuts to the key interest rate seen in recent months come after nearly a year of stagnancy. Prior to June's cut, the rate had been held at five per cent since July 2023. It reached five per cent after an aggressive campaign of rate hikes that the bank embarked on in April 2022 with the goal of tackling high inflation.

Economic growth strengthens, but unemployment still rising

In the second quarter of year, the economy grew by 2.1 per cent, Macklem said, "slightly stronger" than had been forecast in July.But economic activity softened in early summer, he added, and the unemployment rate climbed to 6.4 per cent in June and July.

The increase in unemployment rates is "concentrated in youth and newcomers to Canada, who are finding it more difficult to get a job," Macklem said.

Taylor Schleich, an interest rate strategist with the National Bank of Canada, told CBC News that this increase is the "biggest concern" for the economy right now.

"Most countries are seeing their labour markets weakened, but certainly in Canada, it's been much weaker," Schleich said.

"We don't suspect that things are going to improve materially anytime soon, probably for the rest of this year."

Macklem stressed Wednesday that economic growth needed to pick up to absorb the slack but Schleich says betting on that demand surging back is "just a little bit too optimistic" considering the gradual pace of interest rate relief, suggesting more rate cuts are needed first.

Feeling the impact of rate cuts

Changes in the key interest rate, also known as the policy interest rate, can have far-reaching impacts for mortgages and personal loans.

Some Canadians have been postponing plans in the hopes that interest rates will come down further. Boaz Rachamim, owner of Eisenbergs Sandwich Co. in Toronto, has been wanting to open a new brick-and-mortar location outside of a community centre, but those plans are out of reach right now.

"With the interest rates being where they are currently and just the cost of everything, I think for now it's stopping us from going out and doing that," he told CBC News.

The company first went into business three years ago, during the heat of the COVID-19 pandemic, when interest rates were significantly lower and paying back a loan was less daunting.

"That's why I made the jump initially because there was much less risk," he said.

This new rate cut is "a step in the right direction," but it's too marginal for him to feel confident taking out a new loan to expand.

"It's not just me on the table here," Rachamimsaid. "We have a group of about 20 staff who work with us."

The impact of this Wednesday's rate cut will be felt first by Canadians with variable rate mortgages, Schleich said: "They'll feel the impact of these lower interest rates immediately."

But it could take a while for other areas of the economy to actually register the change and he believes more cuts are needed to make a real difference.

"It's going to take a little bit more interest rate relief for things to really pick up."

WATCH | See the full Bank of Canada briefing:

Bank of Canada governor takes questions after rate cut

9 days ago

Duration 41:17

Bank of Canada governor Tiff Macklem and senior deputy governor Carolyn Rogers speak after the bank's latest policy rate announcement.