Bank of Canada cuts interest rate by half point to 3.75%
The Bank of Canada dropped its policy rate by 50 basis points on Wednesday, bringing the interest rate down to 3.75 per cent, as policymakers try to keep inflation near their target with a fourth consecutive rate cut.
“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,” Bank of Canada governor Tiff Macklem said during prepared remarks in Ottawa. “Today’s interest rate decision should contribute to a pickup in demand.”
He said there was a “clear consensus” among governing council members that it was appropriate to cut by 50 basis points this time.
The decision to make a larger cut comes after the consumer price index hit 1.6 per cent in September, which was below the central bank’s inflation target. The slow growth in prices was driven mainly by a drop in energy prices, but policymakers now expect inflation to remain close to its target over the projected horizon.
The Bank of Canada’s move was widely expected by economists, who think the problem policymakers now face is a weakening economy and deflation.
“Rate cuts will boost the economy with a lag,” Claire Fan, an economist at Royal Bank of Canada, said in a note to clients. “Even with interest rates moving lower, many borrowers can continue to expect debt payments to go up in the years ahead. That speaks to more urgency to ‘front-load’ the easing.”
The Bank of Canada expects gross domestic product (GDP) to have grown by 1.5 per cent in the third quarter, which is below the 2.8 per cent it projected back in July. The unemployment rate hit 6.4 per cent in September, driven mainly by the labour force growing at a faster pace than hiring, disproportionately hitting youth workers.
“After stalling
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