Bank of Canada Opens Door for Accelerated Rate Cuts

The Governor of the Bank of Canada, Tiff Macklem, has suggested that the central bank might accelerate the pace of interest rate cuts if economic growth disappoints. The G7 country recorded an annualized growth of 2.1 percent in the second quarter, but falling oil prices, rising unemployment, and lower immigration rates could push the country to the brink of stagnation. Macklem expressed concerns to the Financial Times about the labor market and the possibility that declining crude oil prices could burden the economy. Since June, the Bank of Canada has cut the key interest rate by a total of 75 basis points over three meetings, from a peak of 5 percent to the current 4.25 percent. With an inflation rate of 2.5 percent, which is close to the bank's target of 2 percent, Macklem now sees room for more aggressive rate cuts. Canada's unemployment rate reached 6.6 percent in August, up from 4.8 percent in 2022. By comparison, the U.S. unemployment rate rose only to 4.2 percent from a pandemic low of 3.4 percent. The U.S. Federal Reserve is expected to cut rates for the first time in over four years on Wednesday, from a 23-year high of 5.25 to 5.5 percent. Macklem emphasized that quicker rate cuts could be appropriate if growth disappointments occur. Despite existing economic uncertainties, the Bank of Canada expects growth of 2 percent for 2024 and 2.1 percent in the following year. David McKay, head of the Royal Bank of Canada, also expressed concerns in Toronto about the direction in which the Canadian economy is heading. Additionally, sharply fallen oil prices have heightened worries. The Canadian oil and gas sector contributed more than 3 percent to GDP in 2022. While the interest rate path is not yet definitively set, the central bank continues to monitor potential inflation risks such as rent and mortgage costs. The tight rental market, exacerbated by high immigration numbers, has led to nearly a 9 percent increase in rental prices year-over-year through July. Canada recorded about 500,000 new arrivals in 2023, a historic high relative to its population of 39 million. Macklem emphasized that rent inflation should decrease, although this might take some time. Canada's productivity growth has remained surprisingly weak since the pandemic, highlighting economic difficulties compared to the U.S. A reduced influx of immigrants might ease the rental market but could exacerbate the overall economic situation. Macklem concluded by stating that the reduced consumer demand from lower immigration rates should be offset by lower borrowing costs. "Our expectation is that consumption per capita will increase," he said.