Will Canada Opt for a Supersized Rate Cut Amid Weak Economic Growth?
The Canadian economy continues to face challenges, with recent data revealing a slowdown in growth that could influence the Bank of Canada’s upcoming interest rate decision. According to Statistics Canada, the economy grew at an annualized rate of just 1% in the third quarter, down from 2.2% in the previous quarter. Real GDP per capita declined by 0.4%, marking the sixth consecutive quarterly drop. These figures have spurred debate among economists about whether the Bank of Canada might implement a significant rate cut in December.
The central bank’s current interest rate stands at 3.75%, following a half-percentage-point cut in October. However, the weaker-than-expected growth, coupled with inflation stabilizing at the 2% target, has led to speculation about the size of the next cut. Economists remain divided. Some, like CIBC’s Andrew Grantham, argue that the disappointing GDP data could justify a more aggressive 50-basis-point cut. Others, including BMO’s Douglas Porter, believe the Bank may opt for a smaller 25-basis-point adjustment, citing upward revisions to past GDP figures as evidence of stronger underlying economic resilience.
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The report highlighted several dynamics shaping the economy. Household and government spending rose, but these gains were offset by declining business investment, slower inventory accumulation, and weaker exports. Consumer spending, buoyed by rising disposable income, helped lift household savings to 7.1%—a three-year high. Yet, sectors such as construction and non-residential investments saw declines, reflecting ongoing pressures from high borrowing costs.
The Bank of Canada’s decision, expected on December 11, will hinge on upcoming labor market data and other economic indicators. While the odds of a 50-basis-point cut have increased, analysts caution that the central bank may prioritize a gradual approach to avoid overstimulating the economy, especially with the Canadian dollar already under pressure.
In this uncertain landscape, policymakers face a delicate balancing act: ensuring inflation remains controlled while fostering growth without exacerbating economic vulnerabilities. Canadians will be watching closely as the Bank of Canada navigates this challenging terrain.
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