Bank of Canada Slashes Key Rate to 2.5%, First Cut in Six Months
The Bank of Canada has reduced its key policy rate by 25 basis points to 2.50%, the lowest in three years. This unanimous decision by the Governing Council responds to a weakening job market, economic contraction, and easing inflation concerns. Over 100,000 jobs were lost in the last two months, and the economy shrank by 1.60% in Q2. Core inflation measures are around 3.00%, with underlying inflation at about 2.50%. The bank signals readiness for further cuts if economic risks intensify, with the next rate announcement on October 29. The Canadian dollar remained steady at C$1.3760 to the US dollar following the announcement.
*this image is generated using AI for illustrative purposes only.
The Bank of Canada has taken a significant step in its monetary policy, reducing its key policy rate by 25 basis points to 2.50%. This marks the first rate cut in six months and brings the rate to its lowest level in three years. The decision, made unanimously by the seven-member Governing Council, comes in response to a weakening job market and easing inflation concerns.
Economic Factors Driving the Decision
The Canadian economy has been facing several challenges:
- Job losses: Over 100,000 jobs were lost in the last two months.
- Rising unemployment: The unemployment rate has reached a nine-year high, excluding the COVID-19 period.
- Economic contraction: The economy shrank by 1.60% in the second quarter.
- Weak outlook: Expectations for the third quarter remain pessimistic.
Inflation and Policy Outlook
Governor Tiff Macklem cited uncertainty from U.S. tariffs as a factor but emphasized that the weaker economy and reduced upside risk to inflation made the rate cut appropriate. The bank's stance on inflation is as follows:
- Core inflation measures are hovering around 3.00%.
- Broader indicators suggest underlying inflation is running at approximately 2.50%.
The Bank of Canada has signaled its readiness to implement further rate cuts if economic risks intensify. The next rate announcement is scheduled for October 29, with money markets currently showing about 48.00% odds of another rate cut at that time.
Market Reaction
Following the announcement, the Canadian dollar remained steady at approximately C$1.3760 to the U.S. dollar. This suggests that the market had largely anticipated the move or that other factors are currently influencing the exchange rate.
Looking Ahead
The Bank of Canada's decision reflects its proactive approach to addressing economic challenges. As global economic uncertainties persist, particularly with regards to U.S. trade policies, the central bank appears poised to take further action if necessary to support the Canadian economy.
Investors and economists will be closely monitoring economic indicators in the coming weeks, as they may provide clues about the likelihood of additional rate cuts in the near future.
15
