The Bank of Canada lowered its overnight policy rate by 50 basis points this morning from 4.25 per cent to 3.75 per cent.  In the statement accompanying the decision, the Bank noted that the economy continues to operate in excess supply as the labour market has softened and economic growth has been modest. However, the Bank does expect growth to strengthen rising from 1.2% this year to 2.1% in 2025. On inflation, the Bank stated that inflationary pressures are no longer broad-based and that consumer and business inflation expectations have largely normalized. The Bank expects inflation to remain close to its 2% target with upward pressures from shelter costs diminishing.  

While the Bank normally reserves movements larger than 25 basis points for more urgent times, with inflation considerably undershooting the Bank’s forecast, monetary policy was about 40bps tighter in real terms than desired and it seems like the Bank preferred to catch-up all at once rather than risk falling further behind the curve.  However, it has also risked setting a new precedent and will have to communicate its intentions going forward very carefully to avoid a market over-reaction. We expect that the Bank will be cutting again in December, though the Bank did not necessarily provide any hints on whether to expect a return to 25 basis point reductions or another jumbo-sized cut. Rather, the Bank simply cited the 50 basis point reduction was to support economic growth and to keep inflation in its preferred range of 1-3%, which is to say it did not say much at all. If inflation continues to fall from its current 1.6% pace or if the economy is looking increasingly weak, it would seem there is now a precedent for more aggressive cuts to the Bank's policy rate.  Interestingly, Canadian 5-year bond yields (the key benchmark for 5-year fixed mortgage rates) have ticked slightly higher in recent days, back above 3%. 

Copyright British Columbia Real Estate Association. Reprinted with permission.