The Bank of Canada slashed its benchmark interest rate for the third time in a row, dropping it by a quarter of a percentage point to 4.25%. 

Governor Tiff Macklem explained that if inflation continues to move closer to the bank’s 2% target, more cuts could be on the horizon. But, with inflation still at 2.5%, the economy’s growth has been sluggish, and the central bank is keeping a close watch.

The unemployment rate has risen to 6.4%, nearly two percentage points higher than its low two summers ago. This has put pressure on the central bank to act.

With a national election on the horizon, housing affordability has become a huge concern for Prime Minister Justin Trudeau’s Liberal government. The central bank said:

“Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation.”

Shortly after the rate cut was announced, Trudeau took to X (formerly Twitter) to say that there’s still “a lot of work to make life more affordable” for Canadians. He also pointed out that this rate cut could offer some relief to those looking to buy a home. 

Taylor Schleich, a rates strategist at National Bank of Canada, said that with rates being so high, the central bank still has some room to make incremental cuts without much risk. 

Schleich warned that perhaps next year, the decisions might become more complicated, but for now, the approach seems to be working.

While the Bank of Canada could opt for larger cuts if the economic situation worsens, Macklem promised that:

“We will be assessing the data as it comes out.”

Tony Stillo, director of economics for Canada at Oxford Economics, added that larger cuts of 50 basis points are unlikely at this stage.

This is happening at a time when other major economies are also considering similar actions. America’s Federal Reserve is expected to lower borrowing costs for the first time in four years during its September meeting.

Analysts are divided on the size of the expected rate cut, with some predicting a 25 basis point reduction and others arguing for a 50 basis point cut.

Similarly, central banks in other G7 countries, including the Bank of England and the European Central Bank, have already started reducing rates as they believe the worst of the inflation crisis is over.

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