The country that surprisingly took the lead in the global pivot of monetary policy was Canada. Despite its high degree of economic integration with the U.S., including geographical proximity, close trade relations, and similar socio-cultural structures, Canada moved first. In early June, the Bank of Canada (BoC) reduced its key interest rate from 5% to 4.75%. Major international media outlets, such as the Financial Times and Reuters, reported that Canada was the first among the G7 countries to lower interest rates. Canada further reduced the rate by 0.25 percentage points on Aug. 24. While major central banks continue to maintain high interest rates (5.25–5.5% annually) and closely watch the U.S. Federal Reserve, Canada’s decision to diverge from this trend, despite its close economic ties with the U.S., has drawn attention.
Weekly Biz interviewed Bank of Canada Governor Tiff Macklem, the key figure behind this decision. “The Canadian and U.S. economies, which had previously shown similar cycles, began to diverge over the last year,” he noted. “Growth has been stronger in the U.S. than in Canada, and inflation has been stickier.” He explained that while the U.S. needed to maintain high interest rates to cool its overheating economy, Canada’s situation was different, prompting an earlier rate cut. Macklem’s commitment to his principles is evident in his statement: “The primary goal of our monetary policy is to keep inflation low, stable, and predictable. While we consider how monetary policy can affect asset prices and financial stability, our goal is to achieve the 2% target for consumer price inflation.”
The BoC’s interest rate cut represents a significant triumph following the global trend of high-interest policies aimed at combating post-COVID inflation. Among the G7 countries, Canada ranks second in GDP per capita ($53,500), following the U.S. ($81,600). The central bank is highly regarded in monetary policy, having “exported” its governor, Mark Carney, who served as the governor of the Bank of England. Macklem has led the Bank of Canada since June 2020. He earned his Master’s and PhD in economics from Western University and has worked at the BoC since 1984. He briefly served as Deputy Minister of Finance during the 2008 global financial crisis and returned to the central bank in 2010. Macklem is often described as a “specialist firefighter” for his adept management of Canada’s economic crises.
◇“Canada and U.S. economies on different paths since last year”
Canada is in a position where it must closely monitor U.S. monetary policy. The BoC’s July Monetary Policy Report notes that the “outlook for growth is weaker” for the United States starting on page three. This early reference to the U.S. highlights Canada’s significant trade dependence on the U.S., which received 77.6% of Canada’s total exports last year.
Realistically, Canada likely had to be mindful of U.S. monetary policy.
“Obviously, what happens in the U.S. economy has a big impact in Canada because our economies are closely integrated, and we tend to have similar economic cycles. However, there can be important differences between the U.S. and Canada. Over the last year, growth has been stronger in the U.S. than in Canada and inflation has been stickier. This largely accounts for the differences in monetary policy.”
Given Canada’s heavy reliance on trade, it’s clear that fluctuations in the exchange rate are a significant concern.
“Like Korea, Canada’s economy functions as an open market, heavily dependent on exports. As a result, we closely monitor global economic trends, particularly those in the U.S., our largest trading partner. While we consider the exchange rate between the Canadian and U.S. dollar when shaping monetary policy, we don’t aim for a specific target. Canada benefits from a flexible exchange rate, allowing us to focus our policy decisions on what best serves the Canadian economy.”
◇Inflation takes priority over asset prices and financial stability
Governor Macklem’s choice to diverge monetary policy from U.S. policy is not a new approach. It was not just this recent interest rate cut—he previously moved more aggressively than the U.S. by raising rates to combat inflation. During the 2022 inflation battle, Canada took bold action, hiking the benchmark interest rate by a full percentage point in a single move.
Can you explain the reasons behind the interest rate cut in more detail?
“Like most countries, Canada saw a large spike in inflation following the COVID-19 pandemic. The Bank of Canada responded rapidly and forcefully, raising the benchmark interest rate from 0.25% to 5% over about 16 months. Our monetary policy played a key role in driving inflation down. After peaking at 8.1% in June 2022, the inflation rate dropped to 2.5% by July of this year, signaling that our actions successfully eased widespread price pressures. As we’ve become increasingly confident that inflation is on a path back to our 2% target, we have lowered our policy rate twice to 4.5%. We anticipate consumer price inflation will continue to decline this fall and stabilize around 2% by next year.”
What’s your take on the plan for further interest rate cuts?
“If the Canadian economy performs as expected, inflationary pressures should ease gradually. If these conditions persist, we may consider further reductions to the benchmark interest rate. However, conflicting factors influence inflation—some work to lower it, while others push it higher. In Canada, the downward trend is primarily driven by weaker household demand and a slightly softer labor market. On the flip side, rising housing costs and price hikes in parts of the service sector are adding upward pressure on inflation. Despite these mixed factors, we expect inflation to decline gradually. However, increased uncertainty, such as the conflict in the Middle East, could affect our inflation outlook. Any decision on additional rate cuts will depend on future economic data and our inflation forecasts.”
Besides inflation, are there other factors considered when setting interest rates?
“When setting the benchmark interest rate, we also consider how monetary policy affects asset prices and financial market stability. We closely monitor the exchange rate between the Canadian and U.S. dollar. However, our main priority is bringing consumer price inflation back to the 2% target. We believe this is the most effective approach to safeguarding the economic and financial well-being of Canadians.”
◇Immigration has boosted the labor force, but productivity and innovation still fall behind
Canada has been a land of immigrants. How has Canada’s immigration policy shaped its economy?
“Over the past few years, Canada has seen a significant rise in population growth, driven by a surge in both permanent immigrants and non-permanent residents, pushing the growth rate to around 3% in 2024. This influx has impacted both supply and demand in the economy. On the supply side, new arrivals have bolstered the workforce, helping to ease labor shortages. However, as employment growth slows, many newcomers are finding it takes longer to secure jobs. On the demand side, these new residents have increased consumption and heightened demand for housing. While the economy has generally absorbed the rising demand for goods and services, the housing market has struggled to keep pace, leading to upward pressure on home prices and rents.”
What is the biggest challenge facing the Canadian economy?
“Over the past 25 years, Canada has successfully grown its economy by expanding its workforce, but it has struggled to boost productivity or output per worker. Productivity growth in Canada has lagged behind that of the U.S. Despite having world-class companies across various sectors that compete well on the global stage, Canadian businesses, on average, invest less in new equipment and research and development compared to their U.S. counterparts. Enhancing productivity growth will require a coordinated effort from both the public and private sectors in Canada.”