The recent decision by the Bank of Canada to reduce its key interest rate by 0.5 percentage points has been well received by Canadians facing challenges with high borrowing costs and inflation. This rate cut, coupled with inflation returning to the 2 percent target, signals positive developments. However, historical instances where such significant rate cuts were made during economic turmoil suggest that there may be other factors at play.
On October 23, the Bank of Canada lowered its key interest rate for the fourth time in 2024, from 4.25 percent to 3.75 percent. Governor Tiff Macklem emphasized that this larger rate cut was aimed at maintaining inflation close to the target of 2 percent. September’s inflation rate was reported at 1.6 percent, with expectations for October to reach 2 percent.
Economists like Doug Porter foresee the possibility of further rate cuts in the future, although they believe that extreme lows of less than 1 percent are unlikely due to fundamental changes in the economy. It is noted that previous instances of significant rate cuts were typically responses to emergencies or crises, such as during the 2008–09 financial crisis.
The decision to implement a substantial rate cut may have been influenced by global economic conditions, as seen in the recent actions of the U.S. Federal Reserve. While not part of a coordinated effort, such moves can impact exchange rates and inflation through imports. Looking ahead, Porter suggests that unforeseen geopolitical crises could prompt additional rate cuts in the future.
The Bank of Canada’s monetary policy report released in October highlighted increased geopolitical uncertainties that could impact the economic outlook. Factors such as conflicts, election outcomes, trade tensions, and tariffs could contribute to potential fluctuations. In light of Canada’s declining per capita GDP, interest rate cuts are seen as a reasonable measure to support economic growth. According to a report by the Royal Bank of Canada (RBC) in July, the metric has declined in six of the past seven quarters. The report highlighted that the decrease in per person output and the rising unemployment rate are indicative of a situation similar to what typically occurs during a recession. This data suggests that Canada’s economy may be experiencing recession-like conditions, despite technically avoiding a recession. For more information, you can refer to the original article here.
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