PROMIT MUKHERJEE and DAVID LJUNGGREN

OTTAWA (Reuters) – The Bank of Canada (BOC) decided on Wednesday to lower its main key rate to 2.5%, the lowest level in three years and the first reduction in six months, due to the weakness of the job market and a lesser concern about the underlying pressures concerning inflation.

This reduction of 25 base points was widely awaited by the markets after the break decided in March which was extended until July. Before this initial break, the BOC had reduced its levels by 225 basic points in nine months, with a first drop in June 2024.

The Governor of the Bank of Canada, Tiff Macklem, said that the negative effect of customs duties wanted by US President Donald Trump resulted in the persistence of considerable uncertainty.

“But with a lower economy and less rising risks for inflation, the Council of Governors judged that a reduction in the key rate was appropriate to better balance risks in the future,” he said at the institution’s decisions at the press conference.

“The bank will continue to assess the risks, on a shorter than usual horizon, and will be ready to react to new information,” he added.

This Wednesday decision was taken unanimously by the seven members of the Council of Governors, said Tiff Macklem.

You have to go back to July 2022 to see the main key rate in Canada at 2.50%.

Initially, the Canadian economy has relatively well resisted the American customs duties imposed in certain essential sectors. But in the past two months, the job market has deteriorated, losing more than 100,000 positions. The unemployment rate has gone up to a nine-year summit, if we exclude the years including the Pandemic of Covid-19.

The gross domestic product (GDP) of Canada contracted 1.6% in the second quarter and the prospects for the third quarter are low.

“In the coming months, the weakness of both demographic growth and the labor market will probably slow down household expenditure,” wrote the Bank of Canada in its monetary policy press release.

The term contracts on the money market show that a new drop in rates, during the meeting of October 29, collects a probability of around 48%.

After the BOC’s decision, the Canadian dollar is exchanged at around 1.376 for an American dollar, practically stable.

Canada faces both customs duties from the United States and China, two of its main business partners. Tiff Macklem stressed that the direct effects of these surcharge could extend to other sectors of the economy.

Many companies have told the Banque du Canada that they suspended their investment plans and that they feared a weakening of demand as economic benefits extend.

( Claude Chendjou, edited by Blandine Hénault)

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