Bank of Canada Implements Largest Rate Cut Since Covid

The Bank of Canada, which may be housing the world's largest housing bubble, has accelerated the pace of interest-rate cuts. This move indicates that the era of high inflation following the pandemic is over. The central bank reduced the benchmark overnight rate to 3.75% on Wednesday, marking the most significant decrease in borrowing costs since the early stages of the pandemic in March 2020.

History of Rate Cuts

The Bank of Canada began to ease borrowing costs in June with a quarter percentage-point reduction. This was followed by a further 25 basis point cut at each meeting in July and September. The final rate decision for this year is set for December 11, with some economists already predicting another 50 basis-point cut.

Key Points from the Decision

The bank stated that the timing and pace of further reductions in the policy rate will be guided by incoming information, and decisions will be taken one meeting at a time. The Bank's preferred measures of core inflation are now below 2%, and with inflationary pressures no longer broad-based, business and consumer inflation expectations have largely normalized. GDP growth is expected to gradually strengthen over the projection horizon, supported by lower interest rates. This forecast largely reflects the net effect of a gradual pick up in consumer spending per person and slower population growth.

Reason for the Cut

The significant cut, which was widely expected by markets and economists, aims to stimulate economic growth and keep inflation close to the 2% target. The 50 basis-point cut suggests a new phase of monetary policy easing, where policymakers aim to return interest rates to more neutral levels to avoid slowing the economy too much and having inflation undershoot the target.

Comments from BOC Governor

BOC governor Tiff Macklem stated that the focus is now on maintaining low, stable inflation. The bank now sees upward and downward risks to its inflation projection as “reasonably balanced,” but with inflation back to 2%, they want to see growth strengthen.

Future Predictions

The Bank of Canada's latest forecasts see policymakers achieving a soft landing, where inflation normalizes without a deep economic downturn. GDP growth, which is expected to be just 1.2% this year, should accelerate next year to just over 2%, while inflation is expected to remain near the midpoint of the 1% to 3% target range.

Market Reaction

The USDCAD remained virtually unchanged as the decision and commentary were both very much as expected. Money markets now price in 31bps of Dec rate cuts (up from 30bps before the decision) and 60bps by January (up from 58bps).

Bottom Line

The Bank of Canada's decision to cut rates is a significant move in the world of finance, marking the largest reduction since the onset of the Covid-19 pandemic. It's a clear signal of the shift in monetary policy to maintain low, stable inflation and stimulate economic growth. What are your thoughts on this development? Do you think it will achieve the desired effect of boosting the economy and keeping inflation in check? Share this article with your friends and discuss it. Don't forget to sign up for the Daily Briefing, available every day at 6 pm.