Posthaste: What GST break could mean for Bank of Canada 50 bps interest rate cut
The Liberals’ announcement Thursday of roughly $6.3 billion in GST/HST breaks and rebates has some economists wondering what that rush of cash into people’s pocketbooks could mean for the Bank of Canada and interest rate cuts.
When inflation was soaring, the Bank of Canada weighed in on federal spending and deficits, calling on government to maintain budget discipline to avoid fuelling consumer demand in ways that could exacerbate the rising cost of living.
That happened when inflation was peaking at 8.1 per cent in June 2022. At the time, the Bank of Canada launched a rate-hiking cycle that saw borrowing costs leap to five per cent from a low of 0.25 per cent.
Today, year-over-year headline inflation has cooled to the central bank’s target rate of two per cent. Policymakers have cut rates four consecutive times with debate swirling about whether the central bank should cut by another 50 basis points when it next meets on Dec. 11.
The Bank of Canada’s benchmark lending rate stands at 3.75 per cent. Economists at banks and financial services companies are forecasting a terminal interest rate of as low as two per cent or lower.
Royce Mendes, managing director and head of macro strategy at Desjardins Group, said the cuts in the form of GST exemptions from Dec. 14 to Feb. 15, 2025, on a variety of items from children’s clothing to Christmas trees, represents roughly 0.2 per cent of gross domestic product (GDP) “and could have a high fiscal multiplier, meaning it could translate into a noticeable boost to growth in the first half of next year.”
In addition to the GST exemptions, Canadians making under $150,000 per year will also receive a $250 rebate in the spring, with the rebates accounting for nearly $5 billion of the
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