Bank of Canada Cuts Interest Rate by 0.5%: What It Means

The Bank of Canada declared progress in its fight against high inflation on Wednesday, delivering a larger-than-usual interest rate cut and indicating that the policy rate is likely to fall further in the coming months.

The central bank lowered its policy rate by a half percentage point—the fourth straight reduction since June—bringing the overnight policy rate to 3.75%.

With annual inflation now approximately 2%, Governor Tiff Macklem said the Bank’s primary task has shifted from reining in price growth to keeping inflation steady around the 2% target.

“We took a bigger step today because inflation is now back to the two per cent target and we want to keep it close to the target,” Macklem said in his opening statement.

He acknowledged the strain high inflation and elevated interest rates have placed on Canadians, adding: “With inflation now back to target and interest rates continuing to come down, families, businesses and communities should feel some relief.”

Canada’s inflation rate dropped to 1.6% in September, supporting forecasts that the Bank could move decisively with a larger cut. Larger reductions enable the central bank to lower rates faster while monitoring incoming economic data.

“The recent data has allowed the Bank of Canada to more decisively plant the victory flag in its battle to get inflation to its two per cent target on a sustainable basis,” wrote CIBC chief economist Avery Shenfeld in a client note, reflecting the broader consensus that price pressures have eased.

The governor said the Bank expects to reduce the policy rate further if the economy follows the central bank’s outlook, but he declined to commit to the size of the next move, including whether another half-point cut is likely in December.

“I’m not going to handicap the next move,” Macklem said. “I think we’ve been pretty clear on the direction. And I think we’ve been pretty clear that the timing and the pace is going to depend on how the data evolves.” He noted that the Bank cannot predict the future and will base decisions on the best available information as events unfold.

Market observers read the announcement as a signal that the Bank may return to smaller, quarter-point cuts in coming months. BMO chief economist Douglas Porter said the tone suggested the Bank is not in a hurry to follow up this larger reduction with another supersized cut.

Still, some forecasters remain open to a further large move. CIBC continues to expect another half-percentage-point reduction in December, arguing that with rates still restrictive for growth, it would take a significant shift in conditions to prevent a similar follow-up cut.

On Wednesday, the Bank pointed to several factors behind the slowdown in price growth: easing shelter inflation, supply in the economy beginning to outpace demand, and lower global oil prices. Based on these developments, the Bank now projects inflation will remain close to the 2% target through its projection horizon, which extends into 2026.

High interest rates have cooled Canada’s economy: growth has slowed and the labour market has loosened. The Bank’s monetary policy report notes that while layoffs have been relatively stable, businesses have pulled back on hiring—an effect that has weighed more heavily on younger workers and recent immigrants.

As interest rates decline, the Bank expects economic activity to strengthen, forecasting a pickup in growth in 2025 and 2026. Households and businesses monitoring borrowing costs and hiring plans will be watching upcoming data and the Bank’s next scheduled announcement on Dec. 11 for further clues about the pace of easing.

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