The Bank of Canada (BoC) cut its overnight rate by 25 basis points to 2.25% this morning, citing weak investment and falling demand. It also reminded Canadians that monetary policy is meant to keep inflation low and stable—then promptly put that on the sideburner. The BoC warned that monetary policy won’t fix the current headwinds, but expects economic erosion to control inflation. Apparently, the inflation mandate has been outsourced to economic devastation, and a resilient economy means life is about to get much more expensive.
Bank of Canada Says Lower Rates Won’t Address Current Economic Issues, Cuts Anyway
The central bank cited eroding economic factors as the primary support for rate cuts. It points to GDP’s 1.6% contraction in Q2, driven by a shock to exports, and weak business investment due to economic uncertainty—primarily around tariffs. They further cite unemployment sitting at 7.1% in September, and slowing wage growth. None of these are directly addressed by monetary policy, but factors the BoC attributes primarily to tariffs.
“Monetary policy cannot offset the long-term implications of US tariffs or other sources of structural change. The primary focus of monetary policy is to maintain low and stable inflation,” explained the BoC in its accompanying report.
To sum up the first few minutes of the BoC conference—it cut rates to support the economy, though it doesn’t believe the easing can actually do much for a structural change… cool?
BoC Dismisses Inflation Warnings, Refers To Feelings Of Inflation
Don’t let the above quote mislead you, the BoC reiterated its primary mandate is maintaining low and stable inflation, but it struggled to explain how this factored into its decision. Headline CPI came in at 2.4% in September, “higher than the Bank had anticipated” and climbed to 2.9% excluding taxes. It further explained that its preferred core inflation measures also remain around 3%, but “underlying” inflation suggests inflation is more like 2.5%.
For those curious what underlying inflation is, earlier this month the BoC explained it’s “not a statistic,” but more of a feeling. The BoC is taking a page out of weather forecasting—inflation is 3.0%, but it feels like 2.5% when adjusted for the bullshitidex. They see underlying inflation um, feeling like 2.0% in the coming months. We imagine underlying inflation also told the Bank’s Governor that he’s smart, handsome, and gosh darnit—people like him.
BoC Addressing Slow Investment & Write-Offs, Little Mortgage Relief
The aggressive rate cuts are praised by the real estate industry, but it may not prove to be the win anticipated. The overnight rate influences short-term borrowing costs, only helping with variable-rate mortgages. Fixed-term mortgages are influenced by Government of Canada (GoC) bond yields, which move with inflation expectations. The 5-year GoC bond yield, which influences 5-year fixed-rate mortgages, climbed 10.8 basis points (bps) on the cut, rolling back 3 weeks of progress in a single day. In other words, the initial reaction was higher borrowing costs for people who don’t want to play rate roulette.
The BoC’s justification here is they expect the drivers of inflation to be tempered by collapsing economic activity. They see higher prices via imported inflation and trade disputes mitigated by falling demand due to worsening economic conditions. The excess supply will lower prices for those who can afford it, so hope for that downturn, otherwise life is about to get much more expensive.
Does it sound like the BoC’s actions are in conflict with its words, and they’re leaving something out? It may have been buried on page 32 of its accompanying report. “Investment will slow, and some existing capital could be written off or diverted toward a less profitable use,” explained the central bank—suggesting they may be pre-emptively addressing a crisis not yet visible to the public.
Canada’s central bank may have reiterated its belief that monetary policy is for inflation control, but it’s demonstrating the exact opposite. BoC research found that monetary policy takes between 18 to 24 months to reach the market. However, it’s using monetary policy as a short-term tool to address problems it acknowledges are out of policy reach—at the expense of higher inflation. Its sole supporting argument being that economic conditions will erode to the point where it will temper its stimulus. Oh my.
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