The central bank was expected to announce a 25 basis point drop in the overnight rate, but cut should have been deeper
By the time you are reading this, the Bank of Canada will likely have announced a 25 basis point (0.25 per cent – editor’s note: it was .50 per cent drop, details here) drop in the overnight interest rate to four per cent. That was the economists’ prediction before the bank’s most recent meeting.
The problem with the decision is not the fact the BOC lowered interest rates but that the magnitude of the cut was not aggressive enough given current Canadian economic fundamentals.
The BOC should have accelerated its interest rate cutting pace to at least 50 basis points. Canadian interest rates are still too high.
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Last week, Statistics Canada estimated that inflation eased in September to 1.6 per cent year on year, which was below the trade estimate of 1.8 per cent year on year. The September consumer price index was also lower than the two per cent year-on-year reading from August.
The core inflation rate remained unchanged at 2.4 per cent, which is just slightly above the BOC’s two per cent target rate for core inflation. The trajectory of the recent inflation trendline is pointing to a core inflation rate moving near or below the BOC target by the first quarter of 2025.
Earlier this month, gross domestic product for the Canadian economy during August was reported by Statistics Canada to have stalled with zero per cent growth during the month. This was down from a 0.2 per cent month-on-month rise in GDP in July. The Canadian economy stalling in August is not good news for economic growth through the last quarter of 2024.
The BOC should have been encouraged by the U.S. Federal Reserve 50 basis point cut in September. The Fed dropped interest rates significantly despite a stronger U.S. economy when compared with Canadian economic growth. The BOC has been content with 25 basis point cuts at every meeting since June, but it is time for the BOC to get serious about interest rate cuts.
The Canadian overnight rate is still 1.5 to two per cent too high relative to a neutral rate, and the data is screaming that we need to get back to a neutral rate as soon as possible. A good start would have been a 50-basis point drop.
The BOC decision has impacts throughout the economy, including the farm. Lower interest rates would provide a much-needed break in financing costs for farmers. Maybe the BOC will come back to reality when they meet in December and begin to aggressively move interest rates closer to neutral.
