Governor Tiff Macklem led policymakers at The Bank of Canada, today, to cut interest rates for the third consecutive time, by 0.25 percentage points, lowering the benchmark overnight rate to 4.25%..
"The Bank of Canada cut interest rates by a quarter percentage point for a third consecutive meeting"
The central bank indicated more rate cuts may come if inflation continues to slow.
"it's 'reasonable' to expect more easing to come if inflation keeps decelerating"
The rate cut was widely anticipated by markets and economists. The Bank's communications remained largely consistent with their July meeting. The central bank is focusing on balancing inflation risks while seeing little evidence of broad-based price pressures.
"Officials' communications were little changed since their July meeting, and highlight the central bank's increased focus on balancing the upside and downside risks to inflation, even as they see 'little evidence' of broad-based price pressures," explains Bloomberg.
Macklem emphasized the need to assess opposing forces on inflation and make decisions one at a time.
"We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time," Macklem said
The Bank aims to see economic growth increase to absorb economic slack.
"We want to see economic growth pick up to absorb the slack in the economy," Macklem said
Policymakers are concerned about potentially undershooting their 2% inflation target.
"We need to increasingly guard against the risk that the economy is too weak and inflation falls too much," the governor said
The Bank acknowledges risks of stronger-than-expected upward forces on inflation.
The bank restated "there remains 'a risk that upward forces on inflation could be stronger than expected'"
Economic growth in Q2 was faster than expected, mainly due to government spending and business investment.
"While the central bank acknowledged that the economy grew faster than expected in the second quarter, officials noted that was largely due to government spending and business investment. Economists predict further rate cuts, potentially reaching 3% by mid-2025. Economists surveyed by Bloomberg in August see the Bank of Canada cutting by a quarter percentage point at each of the next four meetings, with the policy rate falling to 3% by the middle of 2025," says Bloomberg.
The Bank expects wage pressures to ease as the labor market weakens.
"Business layoffs remain moderate, but hiring has been weak," the bank said
Canadian consumers are feeling the impact of higher borrowing costs. "Canadian consumers are feeling the pinch of higher borrowing costs, and per-capita household consumption is falling at a pace usually seen in recessions," says Bloomberg. The unemployment rate has risen but is not expected to increase significantly further.
"While the jobless rate has risen to 6.4%, from 5% at the beginning of last year, it's not forecast to rise much higher than a 6.7% peak at the end of 2024, according to the median estimate"
Source: Bloomberg
