Earlier this month, the Bank of Canada lowered its key interest rate to 4.25 percent, citing the continued easing of inflation. This has been the bank’s third consecutive cut since June, and though widely anticipated by economists, the gradual pace of cuts has sparked some questions about whether or not a larger move might be made. Luckily, isure has everything you need to know.
Bank of Canada prepared to take a bigger step with key interest rate cuts
The decision made earlier this month followed a pattern established earlier this summer. This is when key interest rates were cut to 4.75 percent in June and 4.5 percent in July.
“If we need to take a bigger step, we’re prepared to take a bigger step,” Bank of Canada governor Tiff Macklem stated during a news conference earlier this month. “At this point, 25 basis points looked appropriate.”
According to Macklem, multiple factors were taken into deciding to cut key interest rates. This included the risks that could affect inflation rates. When it comes to the prices for housing and shelter, they are still maintaining an upward inflation pressure. He added that since the rate cut in July, those upward forces have eased slightly.
“At the same time, downward pressure coming from excess supply in the economy remains,” he said. “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts.”
His comments at the conference echo those made in July. Since July, Canada’s annual inflation rate dropped to 2.5 percent in July, down from 2.7 percent in June, according to Statistics Canada. This is the lowest since March 2021, when inflation began to climb amid pandemic pressures. Though inflation is approaching the two percent target the Bank of Canada aims for, the economy still has a way to go.
“The runway’s in sight, but we have not landed just yet,” Macklem said.
Some economists believe bigger key interest rate cuts are needed
Although this cut to key interest rates was expected by many economists, some experts estimated there would be a small chance the bank would make a more drastic cut of 50 basis points. When asked if a cut of that size was in question, Macklem said numerous scenarios were discussed. During these debates, a “strong consensus” was made for their decision. If they find inflation is “significantly weaker than expected,” they are prepared to make a bigger step. Many economists believe this recent move isn’t enough to jump-start the economy.
“The Bank of Canada went with the more cautious approach of yet another quarter-point rate cut, leaving rates still well above where they will have to head to get the economy moving again now that inflation is less of a threat,” Avery Shenfeld, an economist at CIBC Economics, said in a letter to his clients.
As economic growth strengthens, unemployment still rising
During the year’s second quarter, the economy grew by 2.1 percent, Macklem said. This is slightly higher than what was originally forecasted in July. However, economic activity softened in early summer, he added. During this, the unemployment rate climbed to 6.4 percent in June and July. The increase in unemployment rates is “concentrated in youth and newcomers to Canada, who are finding it more difficult to get a job,” Macklem said.
Taylor Schleich, an interest rate strategist with the National Bank of Canada, told CBC News that this increase is the biggest concern when it comes to the economy right now. “Most countries are seeing their labour markets weakened, but certainly in Canada, it’s been much weaker,” Schleich said. Schleich states that they do not suspect things are going to improve materially anytime soon.
Macklem stated during the conference that economic growth is needed to absorb the slack. However, Schleich states betting on that demand is “just a little bit too optimistic.” This is taking into consideration the pace of interest rate relief, stating more rate cuts are needed first.
If economical improvement continues, Canadians can expect more rate cuts later this year. The next rate update is scheduled for Oct. 23. At isure, we understand that the economy can play a huge role on your insurance. Remember to contact us if you have any questions regarding insurance rates and how you can get the best premiums for your budget.
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