The Bank of Canada has lowered its benchmark interest rate for the third consecutive time, dropping it by a quarter of a percentage point to 4.25%. This decision is driven by the need to stabilize inflation in the country and support economic growth.
Reasons for the Rate Cut
Governor Tiff Macklem explained that if inflation continues to move closer to the bank's 2% target, more cuts could be on the horizon. Currently, inflation stands at 2.5%, and economic growth has been sluggish, necessitating close monitoring by the central bank. The unemployment rate has risen to 6.4%, nearly two percentage points higher than its low two years ago.
Reaction from Authorities and Experts
Prime Minister Justin Trudeau took to X (formerly Twitter) to note that there's still 'a lot of work to make life more affordable' for Canadians and emphasized 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, stated that the bank still has room for incremental cuts without much risk. However, he cautioned that next year, decisions might become more complicated.
Global Economic Landscape
Tony Stillo, director of economics for Canada at Oxford Economics, added that larger cuts of 50 basis points are unlikely at this stage. This occurs as 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.
The Bank of Canada will continue to monitor economic data and take additional measures as needed to stabilize inflation and support economic growth. At the same time, economists warn that future situations may require more complex decisions.
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