The Bank of Canada, as expected in the Econoday consensus forecast, aggressively cut its target interest rate by 50 basis points to 3.75 percent, as the central bank shifts its attention from slowing the rate of inflation to jumpstarting economic activity.

"With inflation now back around the 2 percent target, Governing Council decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to the middle of the 1 percent to 3 percent range," the BoC statement said."If the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further."

The central bank expects economic growth to slow from 2 percent in the first half of 2024 to 1.75 percent in the second half, pointing to a decline in consumption and a soft labor market. The BoC forecasts GDP growth of 1.2 percent in 2024, 2.1 percent in 2025, and 2.3 percent in 2026.

It expects inflation to remain close to its target over the projection horizon, with both upward and downward pressures on consumer prices"roughly balancing out."

In his opening remarks at a news conference, Governor Tiff Macklem said,"We took a bigger step today because inflation is now back to the 2% target and we want to keep it close to the target."

"Overall, we view the risks around our inflation forecast as reasonably balanced," the governor said."With inflation back to 2%, we are now equally concerned about inflation coming in higher or lower than expected."

"The timing and pace of further interest rate cuts will depend on incoming information and our assessment of its implications for the inflation outlook," he said."We will take our monetary policy decisions one at a time." He stressed during the news conference that the bank's policymakers will"take our December decision in December" after monitoring GDP, employment and CPI among other indicators while watching various risks closely.

When it comes to lowering rates by either 25 or 50 basis points, that will depend on the economic climate at the time of each policy meeting, he said."We are discovering how the economy evolves like everybody else."

Economists generally expect the bank to continue cutting interest rates to eventually bring the policy rate to around 2.5%, which is considered neutral to economic activity. The BoC's next rate announcements are scheduled for Dec. 11, Jan. 29, March 12, April 16 and June 4.

After a series of 25 basis point rate cuts evidently failed to stem the erosion in Canada's economy, the Bank of Canada is expected to cut rates more aggressively by 50 basis points to lower the target overnight rate to 3.75 percent.

Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.

Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.

Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.