Bank of Canada Governor Tiff Macklem has signaled that the central bank could accelerate the pace of interest rate cuts, including the possibility of 50 basis point cuts. The Financial Times reported Sunday.
The country's economy grew 2.1% year-on-year in the second quarter quarter, but fears are growing that falling oil prices, rising unemployment and lower immigration could push the country closer to stagnation.
Macklem reportedly said during a trip to London last week that policymakers are more concerned about the country's job market and the effects of lower oil prices on the economy.
The BOC has cut rates by 25 basis points three times since June to 4.25% from 5%.
With Canada's inflation rate at 2.5% and close to the central bank's 2% target, Macklem said there was scope to accelerate the pace of cuts, the FT reported.
“As you get closer to the (inflation) target, the risk management calculus changes,” he said. “You worry more about downside risks, and the labor market is pointing to some downside risks.”
Canada's August unemployment rate was 6.6%, down from a 2022 low of 4.8%, a faster pace than in the United States, where the jobless rate has advanced to 4.2% from a COVID-19 pandemic-era low of 3.4%.
The BOC still expects the country's economy to grow 2% this year and 2.1% in 2025.
However, Maklem said that “it may be appropriate to move interest rates faster” if growth does not occur as anticipated, adding that there is “enough slack in the (Canadian) economy to bring inflation back to target,” the FT reported.
“We don't want to see any more slack,” he said.
Canada is a net energy explorer and oil prices have fallen in recent weeks.
Canadian oil producers are used to price fluctuations, but “if this is a really pronounced cycle, it will have a big impact,” Macklem said.
He said the BOC had not yet decided on a faster path to rate cuts and there were still inflationary risks to consider, such as rising house prices, the FT reported.
Furthermore, Canada's productivity growth has been weak since the pandemic.
“What we were thinking was that as those supply chain disruptions were resolved … new workers were trained, you should see a pickup in productivity growth,” Macklem said. “That’s not what happened in Canada and, in fact, it’s not what happened in the U.K. It’s not what’s happening in Europe…”
He reportedly added: “There is something about the pandemic that has really hurt productivity growth in many of our countries… The United States is the exception.”
