Canada Cuts Interest Rate, Bringing Relief to Borrowers Amid Easing Inflation

In a significant move to further alleviate the financial burden on Canadians, the country’s central bank cut its key interest rate by half a point on Wednesday. This decision brings the rate down to 3.75 percent, marking a substantial shift in the country’s monetary policy. The move is a result of what the Bank of Canada claims is a successful battle against inflation, which has been a major economic challenge for the country.

Canada’s benchmark rate had remained steady at 5.0 percent for nearly a year, the highest level in two decades, before the bank initiated a cut in early June. This made Canada the first G7 country to begin trimming rates after a prolonged period of inflation. Despite three consecutive quarter-point cuts, most analysts had forecast more aggressive action for the bank’s October announcement, particularly after recent figures showed inflation had dipped below two percent.

According to Bank of Canada Governor Tiff Macklem, the rate cut is a direct response to the return of inflation to the 2 percent target. “We took a bigger step today because inflation is now back to the 2% target, and we want to keep it close to the target,” Macklem said in a statement to reporters. He emphasized that the focus has now shifted to maintaining low, stable inflation, citing a broad set of data that suggests a return to low inflation.

The central bank has indicated its willingness to cut rates further if the economy develops in line with its forecast. However, Macklem also warned that the bank is now equally concerned about inflation coming in higher or lower than expected. Economists have generally welcomed the move, with CIBC Economics analyst Avery Shenfeld describing the rate cut as a “no-brainer” that plants a “victory flag” in the battle against inflation. James Orlando, a senior economist at TD Bank, believes that rates are still too high given the state of the economy, forecasting further cuts through 2025.

The interest rate cut is expected to bring significant relief to Canadians who have been weighed down by high borrowing costs. Homeowners with variable rate mortgages, in particular, are likely to benefit from the reduced rates, as the high cost of housing has consistently been a central concern for Canadians. As Macklem noted, Canadians can now “breathe a sigh of relief” as the country emerges from the economic challenges posed by the coronavirus pandemic. “It has been a long road back from the high inflation we experienced coming out of the pandemic,” Macklem said, “but it has worked. We are coming out the other side.”