The Bank of Canada (BoC) lowered its key policy interest rate by 25 basis points to 2.50% Wednesday. This decision, which garnered a “clear consensus” within the Governing Council, was driven by a “weaker economy and less upside risk to inflation”.
The BoC’s communication suggests the door remains open for further rate cuts, although they are proceeding carefully and are “not as forward-looking as normal”. Governor Tiff Macklem stated that if the risks tilt further, the Bank is “prepared to take more action,” emphasizing a “one meeting at a time” approach.
If the risks tilt further, we’re prepared to take more action, but we’re going to take it one meeting at a time – BoC governor Tiff Macklem
What made the BoC change its mind from July 30?
There was a “clear consensus” to cut rate at the Sept. 17 meeting. Macklem highlighted several key developments since July 30 that shifted the balance of risks, justifying the cut: Canada’s labor market has softened further, recent data suggests upward pressures on underlying inflation have diminished, and the removal of most retaliatory tariffs by Canada lessens future inflation risks.
While some core inflation measures remain around 3%, the monthly upward momentum has dissipated, and underlying inflation is assessed to be around 2.5%. The Canadian economy contracted by 1.6% in the second quarter, and the job market has deteriorated, with the unemployment rate rising to 7.1%, the highest since May 2016, excluding the 2020 and 2021 pandemic years.
At this rate decision, there was clear consensus to lower our policy rate for the first time since March – BoC governor Tiff Macklem
The policy rate of 2.50% remains within the nominal neutral range of 2.25 to 3.25%.
What will the BoC watch?
The BoC’s careful, data-dependent approach underscores that future monetary policy decisions will hinge on incoming economic data and the ongoing assessment of risks and uncertainties, particularly those stemming from global trade tensions.
The central bank will be closely assessing how exports evolve, the spillover effects on business investment, employment, and household spending, how trade disruption costs are passed on to consumers, and the evolution of inflation expectations.
Federal budget to be tabled after the Oct. BoC meeting
A date to watch will be Nov. 4, as the federal government will table the 2025 budget.
Macklem noted that the Bank will assess the implications for Canada’s economic and inflation outlook, and ultimately for what we need to do with interest rates.
However, this information won’t be available by the Oct. 29 BoC meeting. That being said, leaks often happen when it comes to the budget and current assessments and comments point to higher deficits than current estimates.
Interim Parliamentary Budget Officer Jason Jacques said he doesn’t even know if the government currently has fiscal anchors although Prime Minister Mark Carney stated shortly after that his government does have an anchor.
The Office of the Parliamentary Budget Officer estimates the government’s budget deficit for 2024–25 C$46.0 billion (1.5% of GDP). The watchdog also expects the federal government to spend C$159 billion on infrastructure between 2025-26 and 2029-30, without taking the revised NATO 5% spending target into account.
Carney’s government has signalled plans to reduce the size of the public sector, at least in part through attrition. However, PBO’s Jacques indicated in an interview with CTV that attrition won’t do much, if anything, to help deficits.
For the order of magnitude that you’re looking at, it would be highly unlikely that you’d be able to close a deficit or reach a number that big without the path going through personnel costs, so without some sort of reduction or substantial changes in the composition of the public service. PBOs’ Jason Jacques
Times are very interesting for public affairs. Stay tuned for updates!
