The BoC’s key rate was slashed from 4.25% to 3.75% today. This will cause the effective Prime Rate at major financial institutions in Canada to drop from 6.45% to 5.95%.

The BoC observed that their target inflation rate is back below 2% now, with September coming in a 1.6%. This gave cause to cut their key rate by a half point (50 basis points) rather than just a quarter percentage point.

Economists widely believe that the BoC’s biggest challenge now is dealing with a weakening economy and deflation. GDP (economic) growth was over 2% in the first half of the year and is expected to fall below that to 1.6-75% in the second half of this year.

There is excess capacity on the supply side of the economy and the labor market is soft, with a 6.4% inflation rate.

What does all of this mean?

Canada’s core economic fundamentals have not changed. Productivity of output is not competitive versus other Western economies. Tax rates and types are too many & onerous. Unbridled high immigration is untenable for absorption into the Canadian economy. Housing values will continue to increase unreasonably. The standard of living is declining in the wake of such overbearing economic factors. If you are a net borrower going forward you will not be able to prosper easily. If you have unencumbered assets you will be fine, but currency exchange rates may hamper your travel plans, especially to the U.S. and Europe.

The good news for borrowers though is that lending rates (not including credit cards) are on their way down and will continue so into next year. This will affect borrowers differently based on whether they are in fixed debt vs. floating debt.

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