The Bank of Canada’s half-point rate cut this week its largest since the 2009 financial crisis, outside of the pandemic feels like a sigh of relief for many Canadians. After nearly two years of battling inflation, Governor Tiff Macklem finally declared victory, inflation is back at the 2 per cent target and even dipped below, to 1.6 per cent in the latest reading.
This was the justification for Wednesday’s “jumbo cut,” which brought the central bank’s key rate down to 3.75 per cent. The move was bigger than most forecasters expected, but Macklem made the case that with inflation largely under control, it’s time to turn the focus toward growth, jobs, and confidence in a struggling economy.
And make no mistake: Canada’s economy is struggling. The unemployment rate sits at 6.5 per cent, growth in the third quarter missed the bank’s own projections, and households are still carrying the weight of higher costs from the pandemic years. That’s why the central bank is banking on rate cuts to spark spending, encourage business investment, and restore some momentum.
For homeowners and borrowers, the cut offers immediate relief. Those with variable-rate mortgages will see lower payments, and for people facing renewals, the pain should ease somewhat. That’s the good news. The bad news is that lower borrowing costs also risk heating up the housing market again. We’ve been here before: falling rates lure buyers back in, prices jump, and affordability gets even worse. With Ottawa’s new mortgage rules set to make borrowing easier in 2025, the risk of a rebound in prices is very real.
The central bank seems aware of this trade-off. In its September deliberations, it admitted that a strong rebound in housing activity could force it to slow or even pause rate cuts. But that hasn’t stopped it from opening the door to more easing in December and into 2025.
This is where the uncertainty lies. Macklem is refusing to tie himself down to a timetable for future cuts, saying it depends on “how the data evolves.” Economists are split: some see another big cut coming in December, others think the bank will return to smaller, quarter-point steps. Financial markets are hedging their bets, with odds leaning toward a 25-basis-point move.
In truth, the size of each cut might not matter much. As TD’s James Orlando put it, “whether it’s 25, 50, 75, who knows. But they’re going down.” The direction is clear: rates are heading lower.
Still, the Bank of Canada faces a balancing act. Cut too slowly, and the labour market could deteriorate further, with layoffs spreading. Cut too quickly, and the housing market could overheat again, undoing progress on affordability.
For now, Canadians can breathe easier knowing inflation is back under control. But the fight isn’t over it’s just shifting. From here, the challenge isn’t about taming inflation, but about keeping the economy afloat without reigniting the very problems we’ve just managed to put behind us.
