On Wednesday, the Bank of Canada lowered its policy rate by 25 basis points to 2.25%.
The bank said that the current stance is about right for keeping inflation close to 2% while the economy adjusts. It also said that it is still ready to act if the outlook changes. The deposit rate is 2.2%, and the Bank Rate is now 2.5%.
Wednesday’s cut was the second in a row, following September’s cut, and it brought the benchmark to its lowest level since mid-2022.
Governor Tiff Macklem said that officials will look at new data before making any more moves. The markets saw this as a sign that they might pause.
In September, the headline consumer price index was 2.4%, while the underlying measures were just above that.
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The bank’s most recent forecasts show that inflation will stay close to the target level over the next few years, even as the economy adjusts to the new trade conditions.
Output went down in the second quarter, and the job market has cooled down, which is a sign of weaker exports and business investment.
Policymakers said the cut was support during a time of structural adjustment, not a shift to quick stimulus. They also stressed that any further action would depend on certain conditions.
The bank’s inflation framework, which puts price stability at 2%, is now in line with rates.
Since the early 1990s, that promise has been at the heart of policy, and the bank has reaffirmed it many times in the last few years.
If you want to know more about the target, read our article about why the Bank of Canada wants to keep inflation at 2%.
The bank’s forecasts take into account the fact that uncertainty is making people less likely to invest and making it harder to see how exports will do in the future.
Lenders will change prime rates, which will help some people with variable rate mortgages and lines of credit. However, the effect will depend on the product and lender.
Bond yields, which show what people think will happen with inflation and future policy, not just one decision, set fixed mortgage rates.
However, as we saw in Canada, repo market strains can happen around the end of the quarter and when liquidity is low.
Officials spoke in a practical way, they said in the statement that the policy rate is about right and that they will be ready to act if things change.
Tiff Macklem said that monetary policy can’t directly help the sectors that are most at risk, but it can help the overall adjustment by keeping inflation close to 2%.
The direction we take from here will depend on inflation data, the state of the job market, and changes in U.S. trade policy.
If price pressures go down as expected and growth stays slow, the bank’s stated approach would be to keep rates at 2.25% for a long time. A sudden rise in inflation or a sharper drop could make officials get involved.
