Bank of Canada Governor Tiff Macklem has signaled the central bank may speed up with 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% Y/Y in the second quarter, but fears are growing retreating oil prices, increased unemployment, and lower immigration could drive the country closer to stagnation.
Macklem reportedly said during a trip to London last week policy-setters have become more concerned about the country’s labor market and the effects of lower crude prices on the economy.
The BOC has cut rates by 25 basis three times since June to 4.25% from 5%.
With the Canadian inflation rate at 2.5% and near the central bank’s 2% target, Macklem said there was leeway to step up the pace of cuts, FT reported.
“As you get closer to the [inflation] target, your risk management calculus changes,” he was quoted as saying. “You become more concerned about the downside risks. And the labor market is pointing to some downside risks.”
The August unemployment rate in Canada was 6.6%, up from a low of 4.8% in 2022, a faster pace than in the US, where the unemployment rate has advanced to 4.2% from a COVID-19 pandemic-era low of 3.4%.
The BOC still anticipates the country’s economy will grow 2% this year and 2.1% in 2025.
However, Maklem said “it could be appropriate to move faster [on] interest rates” if growth doesn’t happen as anticipated,” adding that there is “enough slack in the [Canadian] economy toi bring inflation back down to target,” the FT reported.
“We don’t want to see more slack,” he was quoted as saying.
Canada is a net energy explorer, and oil prices have fallen in the past few weeks.
Canadian oil producers are used to price fluctuations, but “[i]f it’s a really sharp cycle, it’s going to have a big impact,” Macklem reportedly said.
He said the BOC had yet to decide on a faster path of rate cuts, and there were still inflation risks to watch, such as shelter prices, the FT reported.
Also, Canada’s productivity growth has been weak since the pandemic.
“What we thought was that as those supply chain disruptions are worked out…new workers get trained, you should see some pick-up in productivity growth,” Macklem was quoted as saying. “That is not what happened in Canada, and in fact it’s not what happened in the UK. It’s not what’s happening in Europe…”
He reportedly added, “There’s something about the pandemic that has really hurt productivity growth in many of our countries…the US is the exception.”