Bank of Canada cuts key interest rate to 4.25%

On Wednesday, the Bank of Canada implemented its third consecutive interest rate cut, lowering the key lending rate to 4.25 per cent.

This quarter-point reduction was largely anticipated by experts due to ongoing economic weakness and declining inflation.

Governor Tiff Macklem explained that the central bank's decision was influenced by two main factors.

“Firstly, both headline and core inflation have continued to decline as predicted,” Macklem stated.

“Secondly, as inflation nears its target, we need to see economic growth strengthen to reduce economic slack, ensuring inflation sustainably returns to the two per cent target.”

Although the Bank of Canada acknowledged stronger-than-expected economic growth in the second quarter, preliminary data for June and July indicate a slowdown in economic activity.

“It’s often said that victory favors the bold, but the Bank of Canada chose a more cautious approach with another quarter-point rate cut, keeping rates higher than where they may need to be to stimulate the economy as inflation subsides,” commented CIBC chief economist Avery Shenfeld.

Shenfeld noted that while there was some speculation about a half-percentage-point cut, the central bank opted for a balanced strategy.

Macklem reiterated that if inflation continues to decrease as expected, additional rate cuts are likely.

Canada’s annual inflation rate has remained below three per cent for several months, reaching 2.5 per cent in July.

With the inflation target within reach, Macklem has emphasized the need to balance potential risks.

“There is a possibility that inflationary pressures could be stronger than anticipated,” Macklem warned.

“However, with inflation nearing the target, we must also be vigilant against the risk of the economy weakening too much, causing inflation to fall excessively.”