Bank of Canada Lowers Key Interest Rate to 4.25%, Marking Third Consecutive Cut
The Bank of Canada has implemented its third consecutive rate cut, reducing the interest rate from 4.50% to 4.25%. This quarter-point cut, anticipated by many analysts, reflects ongoing economic challenges and a gradual easing of inflation pressures.
Governor Tiff Macklem explained that the decision was driven by two key factors.
Both headline and core inflation rates have continued to ease as anticipated.
As inflation nears the central bank’s target, it's crucial for economic growth to accelerate to absorb the existing slack in the economy, ensuring inflation returns sustainably to the 2% target.
While Canada’s economy grew faster than expected in the second quarter, preliminary figures for June and July indicate a slowdown in economic activity. This suggests the Bank of Canada is taking a measured approach, opting for a modest rate cut rather than more aggressive action.
CIBC’s chief economist, Avery Shenfeld, noted that while some had speculated about a more significant half-point rate reduction, the central bank chose a cautious path. Shenfeld emphasized that rates remain higher than necessary to fully reinvigorate economic growth, especially as inflation risks diminish.
Governor Macklem reiterated that further rate cuts could be on the table if inflation continues to decline as expected. Canada’s annual inflation rate has remained below 3% for several months, reaching 2.5% in July. As inflation nears the Bank’s 2% target, Macklem stressed the need to balance risks, ensuring that inflation does not fall too rapidly or that economic weakness doesn’t become too pronounced.
Bottom Line:
The Bank of Canada's latest rate cut highlights a careful balancing act between managing inflation and supporting economic growth. As inflationary pressures ease, the focus now shifts toward stimulating the economy without destabilizing progress. With additional rate decisions expected later this year, market participants will be closely watching the Bank’s next moves.
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