The Bank of Canada made an unexpected move by cutting interest rates by 50 basis points, bringing the overnight rate to 3.75% from 4.25%. This decision comes after three consecutive 25 basis point cuts earlier this year due to the underperforming Canadian economy. Despite these previous cuts, the economic situation has continued to weaken, with risks to inflation now leaning towards the downside of the BoC’s 2% target.
In September, consumer price index growth fell below 2% year-over-year for the first time since the pandemic began. This decrease can be attributed to lower energy prices and a general easing of inflation pressures. The current economic indicators are not promising, with Q3 GDP growth below the BoC’s forecast and the unemployment rate higher than a year ago.
Governor Tiff Macklem has expressed concerns about the impact of high interest rates on the economy, stating that economic growth must pick up to prevent inflation from dropping below the 2% target. The BoC aims to bring interest rates back to a more neutral level quickly, estimated to be between 2.25% to 3.25%. However, further rate cuts may be necessary to avoid a prolonged economic slowdown in Canada.
Looking ahead, analysts are expecting a 0.5% increase in Canadian retail sales for August, in line with previous estimates. However, recent data on card transactions suggests a possible decrease in September sales, indicating a potential slowdown in consumer spending.
Overall, the Bank of Canada’s decision to cut interest rates reflects a sense of urgency to support the economy and prevent a further decline. With inflation risks on the horizon and economic indicators pointing to a continued softening, additional rate cuts may be necessary in the near future to stimulate growth and stabilize the Canadian economy.
