A good-looking story?
THE CANADIAN PRESS
Bank of Canada Governor Tiff Macklem and his Governing Council colleagues lowered borrowing costs at a fourth-straight meeting in Ottawa Wednesday.
Almost lost amid the immigration news was the Bank of Canada’s decision to cut interest rates by half a percentage point on Wednesday.
A 50 basis-point cut is usually reserved for crises, and it’s been more than two decades since the central bank made such a move outside an emergency. But Governor Tiff Macklem was quick to downplay concerns. “It’s a pretty good-looking story: lower inflation, lower interest rates, and a pickup in growth,” he said during the subsequent press conference.
The central bank has cut rates by 1.25 percentage points since June and expects to continue easing, now that inflation is back to its 2 per cent target. Despite the recent cuts, borrowing costs remain elevated for an economy that is showing signs of weakness. And more rate cuts are expected: economists predict at least another percentage point of easing over the next few quarters.
Based on new forecasts this week, the Bank of Canada believes the combination of the lower interest rates (which should spur household consumption) and strong U.S. growth (which should boost exports) will help our economy rebound after two years of extremely sluggish growth. The forecasts call for growth of 2.1 per cent next year and 2.3 per cent in 2026.
The federal government’s immigration move, however, casts serious doubt on whether things will play out like that. To be sure, slower growth will make the Bank of Canada uneasy—which could give it reason to continue cutting interest rates. At the same time, the potential loss of hundreds of thousands of workers will do a lot of heavy lifting in terms of eliminating slack in the economy.
The bank is trying to bring down unemployment, which it had forecast would be elevated through the end of 2025. That assumption may no longer hold.
Speaking to reporters on Friday while in Washington for meetings at the IMF, Governor Tiff Macklem said he doesn’t expect the move to have an impact on the central bank’s inflation forecasts, though it could slow down the economy.
Weakening growth that doesn’t come with easing inflation pressures to facilitate rate cuts is hardly a great outcome for policy makers.
