What the Bank of Canada's jumbo rate cut says about the economy — and what will happen next
It’s not often that theBank of Canada decides to make a “jumbo” rate cut, but that’s exactly what it did last week when it cut its policy rate by 50 basis points to 3.75 per cent. A “jumbo” or “oversized” rate cut is a term used to describe moves of more than 25 basis points. Usually, jumbo cuts come when the bank has urgent concerns about economic growth and wants to quickly encourage economic activity, but that is not always the case. So why did the Bank of Canada go big last week, and what usually happens next? The Financial Post explains.
The Bank of Canada usually takes an incremental approach to interest rate moves, preferring 25 basis-point steps, both up and down, to give its monetary policy decisions time to work through the economy.
However, the central bank will not hesitate to pull the trigger on a larger move if needed. Reasons for larger-than-normal moves in the past have included negative or stalling economic growth, emergency situations such as the pandemic, or a surge in inflation. For example, when price growth began to accelerate in the summer of 2022, the Bank of Canada raised its policy rate by 100 basis points in July. It was followed up by another hike of 75 basis points that September.
If things are urgent enough, it can even call emergency meetings to introduce faster cuts or hikes, as it did in March 2020, when then-governor Stephen Poloz brought the overnight rate down from 1.75 per cent to 0.25 per cent in the span of just one month through a series of jumbo cuts.
As noted, the most recent example of the Bank of Canada cutting big was at the outset of the pandemic, when Canadian and global economies slowed rapidly due to COVID-19 lockdowns.
In March 2020, GDP contracted by 7.2 per cent,
Read more on financialpost.com
