Bank of Canada opts for bumper cut to boost growth

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The Bank of Canada has cut interest rates by half a percentage point for the second consecutive meeting, lowering its benchmark rate to 3.25 per cent in a bid to boost growth.

Rate-setters said they would assess “the need for further reductions in the policy rate one decision at a time”.

“Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook,” the central bank said on Wednesday following the decision.

The central bank has cut borrowing costs five times so far this year to combat a rise in unemployment and other economic weaknesses.

Economists believe that borrowing costs are likely to fall further, especially if US president-elect Donald Trump goes ahead with his threat to impose 25 per cent tariffs on all Canadian imports. The US is Canada’s biggest trading partner.

“With recent tough talk on trade coming from south of the border, the market has increasingly priced in the probability that Canada will need another large cut,” said Chris McHaney, head of investment management and strategy at Global X Investments Canada.

Nathan Janzen, an economist at the Royal Bank of Canada, said rate cuts so far had been the equivalent of the central bank “easing off the economy’s brakes rather than stepping on the gas”.

“Canada’s economic backdrop has yet to crumble in a way that would cause the Bank of Canada to panic, but it is also clear that interest rates are higher than they need to be for inflation to hold at the central bank’s 2 per cent target,” he said.

Despite the consecutive cuts meaning good news for homeowners in Canada, rising unemployment and low growth dominate a less than impressive outlook.

Canada’s official data agency reported on Friday last week that the unemployment rate rose to 6.8 per cent, up from 6.5 per cent. At the end of November, Statistics Canada said the economy grew at an annualised rate of 1 per cent in the third quarter, with the expansion largely due to higher government spending.