(Bloomberg) — Gov. Tiff Macklem provided more insight into the Bank of Canada’s decision to make a massive interest rate cut last week, saying the easing made sense given the aggressiveness with which it has increased borrowing costs to curb price pressures in recent years.

Speaking Monday at an event in Toronto hosted by technology publication The Logic, Macklem pushed back against suggestions that interest rate cuts larger than a quarter point should only coincide with emergencies or periods economic stress.

“It makes sense to take bigger steps than normal when you’ve made really big steps forward,” Macklem said. Starting in March 2022, the central bank raised the overnight benchmark rate from 0.25% to 5% in less than a year and a half.

Macklem also said the central bank will need to “discover” the neutral rate – the theoretical level of borrowing costs that neither stimulates nor constrains the economy – as it eases monetary policy.

While policymakers estimate the range between 2.25% and 3.25%, Macklem reiterated that the conditions that would reveal an exactly neutral rate require a situation in which there are no shocks to the economy, the inflation is at the 2% target and growth is close to capacity. , which, according to him, “will never happen”.

The comments suggest that while officials are committed to continually reducing borrowing costs, there is no predetermined path and they remain uncertain about the exact direction of interest rates in Canada. This is one of the first times Macklem has signaled that the central bank may eventually seek an endpoint as it further normalizes rates.

“We don’t know exactly the pace. We don’t know exactly where the landing is,” Macklem said.

Overnight swap traders are betting the central bank will cut the policy rate to around 3% by March 2025, but have not fully priced further cuts after that meeting.

“This highlights how much greater uncertainty there is when it comes to forecasts,” Benjamin Reitzes, a rates and macro strategist at Bank of Montreal, said by email. “The US elections, immigration changes, possible Canadian federal elections and various provincial elections: there are many variables causing uncertainty about the outlook. »

Last week, policymakers cut the policy rate by 50 basis points, to 3.75%. Easing of this amount is not common in Canada when the central bank brings interest rates back to more normal levels, and it usually coincides with recessions.

A sharp decline in economic growth in Canada is not the base case for the central bank or most economists, but officials have justified their decision to opt for more easing by saying it is to “maintain a soft landing”.

–With help from Curtis Heinzl.

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