Balancing Act: Navigating interest rate cuts and economic growth in Canada

Anne McLellan and Lisa Raitt

In the coming weeks and months, the Bank of Canada is expected to continue its cycle of interest rate cuts that will provide some welcome relief for our economy.

In June, central bank policy makers led by Governor Tiff Macklem cut their main policy rate by a quarter percentage point to 4.75 per cent, citing continued evidence that inflation is easing.

Economists are predicting the rate will be cut again as early as July.

Inflation has held below 3 per cent in every month of 2024, after averaging 3.9 per cent last year. Should the trend hold, this will give policymakers more leeway to ease monetary policy.

The fact that inflation and interest rates may be coming down is great news. However, the deterioration of the macroeconomic environment over the past three years has been a major burden on households and businesses, impeding our ability to generate inclusive and sustainable growth.

High borrowing costs and consumer prices have caused poverty rates to rise and real incomes to fall. Young families and low-income earners have been hit hard by the increases in both the cost of living and the cost of credit.

According to the latest income survey data from Statistics Canada, median after-tax incomes of Canadian households fell 3.4 per cent in 2022, and the poverty rate jumped by 2.5 percentage points to 9.9 per cent.

The worsening financial situation of households, meanwhile, slowed demand for goods and services, adding another major headwind for businesses.

We have confidence the Bank of Canada will do the right thing. Getting the macroeconomic policy right is of fundamental importance. The best type of environment for business investment are those where policy achieves low and stable inflation. It’s important that policy makers give the central bank room to do its job.

But we also need to be realistic. Lower rates won’t fix the deep issues facing an economy stuck in a slow growth rut. We are dealing primarily with structural economic problems — including the chronic shortage of affordable housing. Making debt cheaper for Canadians, who are already among the most indebted households in the world, won’t be a panacea.

The Coalition believes the only way to produce higher standards of living and real wages for workers on a sustainable basis is to increase our productive capacity, in part with smart policies that stoke private sector investment.

However, we continue to see a lack of serious debate about solutions to these deeper economic issues — whether it be smart climate policy that doesn’t undermine our ability to grow the economy or taxation that doesn’t spook investors.