The Bank of Canada’s decision to trim its key policy rate by another 25 basis points, bringing it down to 4.25 percent, was no surprise. Markets had already priced it in, and Governor Tiff Macklem’s remarks made it clear the central bank is leaning toward keeping the easing cycle alive. But here’s the bigger question: with growth weakening faster than expected, is the Bank moving too cautiously?
After holding its benchmark rate at a 20-year high of 5 percent for a full year, the Bank finally blinked in June. Since then, it’s delivered three consecutive cuts, citing easing inflationary pressures. Inflation, in fact, has cooled more than many had hoped it’s now at a 40-month low of 2.5 percent, only slightly above the bank’s 2 percent target.
But the economy is telling another story. Growth that looked solid in the second quarter has stalled, unemployment is creeping higher, and Canada’s ability to absorb a rapidly growing labor force is being tested. In short, the momentum that policymakers predicted just weeks ago doesn’t seem to be materializing.
That’s why Macklem’s comments matter. He acknowledged not just the progress on inflation, but the very real risk that the economy is too weak. And while he left the door open for a larger 50-basis-point cut later this year, the central bank still seems hesitant to move boldly.
Caution makes sense when inflation remains sticky in areas like housing and services. But the reality is that monetary policy works with a lag. If the Bank waits too long for perfect inflation data, it risks tightening into weakness something no central bank wants to admit until it’s too late.
Financial markets are already betting on another 25-point cut in October, and a further reduction in December is fully priced in. Some economists, though, are starting to argue for a jumbo cut to prevent the slowdown from becoming something worse. History backs them up: the last time the Bank cut rates at three consecutive meetings was during the global financial crisis in 2009.
The BoC was the first G7 central bank to begin cutting rates this time around, and it deserves credit for that. But leadership also means knowing when incrementalism is no longer enough. If the data keep weakening, the Bank will need to consider bigger, faster moves not just cautious nudges.
The bottom line is this: Canada’s inflation fight is nearly won, but the growth battle is just beginning. The Bank of Canada shouldn’t wait too long to recognize that.
