The Bank of Canada has implemented its third consecutive rate cut, reducing its key interest rate to 4.25% on Wednesday, citing the ongoing easing of inflation.

While the move was largely expected by economists, the gradual pace of these cuts has raised questions about when the central bank might take more significant action.

“If we need to take a bigger step, we’re prepared to do so,” Bank of Canada Governor Tiff Macklem stated during a news conference on Wednesday. “At this point, a 25 basis point reduction seemed appropriate.”

This decision continues the pattern set earlier this summer, with rates being cut to 4.75% in June and 4.5% in July.

Bank of Canada governor noted that the decision factored in the risks that could influence inflation rates. He mentioned that prices for housing, shelter, and certain other services continue to exert upward pressure on inflation. However, since the rate cut in July, those inflationary pressures “have eased slightly.”

“At the same time, downward pressure from excess supply in the economy persists,” said the Bank of Canada governor. “If inflation continues to ease in line with our July forecast, further rate cuts can be reasonably expected.”

The Bank of Canada governor’s comments on Wednesday mirror those he made in July. Canada’s annual inflation rate fell to 2.5% in July, down from 2.7% in June, according to Statistics Canada in August. This marks the lowest inflation rate since March 2021, when inflation began to rise due to pandemic-related pressures and supply chain disruptions.

While inflation is nearing the Bank of Canada’s 2% target, the economy still has some distance to cover.

“The runway’s in sight, but we haven’t landed yet,” the Bank of Canada governor remarked.

Some economists argue that larger rate cuts are necessary.

Although a quarter-point reduction was anticipated, some experts had speculated there was a slight possibility of a more significant cut of 50 basis points.

When questioned about the consideration of such a larger cut, Macklem acknowledged that various scenarios were discussed. However, there was a “strong consensus” for the 25 basis point cut that was implemented. He added that if inflation proves to be “significantly weaker than expected,” a larger reduction could be considered.

“We will base our decisions on the data available,” the Bank of Canada governor stated.

Some experts believe that Wednesday’s move might not be bold enough to effectively stimulate the economy.

“The Bank of Canada opted for a more cautious approach with another quarter-point rate cut, leaving rates still significantly higher than necessary to stimulate the economy effectively now that inflation is less of a concern,” Avery Shenfeld, an economist at CIBC Economics, noted in a client memo.

The recent cuts to the key interest rate follow nearly a year of stagnation. Before the reduction in June, the rate had been maintained at 5% since July 2023. This level was reached after a series of aggressive rate hikes initiated by the bank in April 2022 to address high inflation.

In the second quarter of the year, the economy grew by 2.1%, which was “slightly stronger” than forecasted in July, according to Macklem. However, economic activity softened in early summer, and the unemployment rate rose to 6.4% in June and July.

Macklem noted that the increase in unemployment is primarily affecting youth and newcomers to Canada, who are struggling to find employment.

Taylor Schleich, an interest rate strategist with the National Bank of Canada, told CBC News that this rise in unemployment is the “biggest concern” for the economy at present.

“While many countries are seeing weakened labor markets, Canada’s situation is notably worse,” Schleich said. “We don’t expect significant improvements soon, likely not for the rest of the year.”

Macklem emphasized the need for economic growth to pick up to address the slack, but Schleich argued that relying on a surge in demand might be “a bit too optimistic” given the gradual pace of interest rate adjustments. He suggested that further rate cuts might be necessary before significant improvements can be expected.