Canada’s economy is slowing to the point that the Bank of Canada was comfortable making another interest-rate cut on Wednesday as it lowered its policy rate to 2.25 per cent.
For some time, we have made the case that the Bank of Canada needed to get on with it and cut rates to get the country’s increasingly sluggish economy moving again.
Going forward, a lagging labour market should be a major focus for businesses and individuals after a second-consecutive interest rate cut. Should job and wage growth continue to proceed at a weak pace, soft aggregate demand should translate into a more modest pace of inflation.
It is important that the Bank of Canada provide a credible forward-looking forecast and not fall into the trap of being overly dependent on noise associated with high-frequency data.
The era of sub-two per cent inflation is firmly in the rearview mirror. It is better that the central bank makes policy decisions in light of what is likely to be inflation that resides in a range between 2.5 per cent and 3 per cent rather than set policy around current prices of food, gas and housing.
While the Bank of Canada attempted to temper expectations of future rate cuts should the economy not reaccelerate into 2026, that may be a bit too conservative relative to the needs of the domestic economy.
Therefore, there likely won’t be another rate cut at the December meeting—however, we do not believe that monetary policy is on a pre-set course.
Given the potential for further global economic disruption, it is wise that the Bank of Canada clearly communicate to both the public, policymakers and the investment community.
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