Bank of Canada Slashes Rates for the Third Consecutive Month

More Rate Cuts Predicted

The Bank of Canada has reduced its overnight lending rate by 25 basis points for the third consecutive month. This move was anticipated by economists and is justified by the bank due to the ongoing easing of inflationary pressures. In a comparison of the recent two statements, the bank's rationale for the persistent rate cuts is revealed.

BOC Governor's Comments

Bank of Canada Governor Tiff Macklem, when discussing the decision, emphasized that "it’s reasonable to expect further cuts". He also mentioned that policymakers are still evaluating the tension between economic weakness, which is exerting a downward pressure on inflation, and the high costs of shelter and certain services, which are keeping it high. However, Macklem acknowledges that inflation may rise later in the year due to the unwinding of base-year effects. He also warns of the risk that the upward forces on inflation could be stronger than anticipated. This would force the central bank to abandon its easing campaign, increase rates, and risk losing credibility.

Future Rate Cuts Expected

Despite the potential risks, Macklem believes that further rate cuts are the most probable course of action, even if it may lead to more inflation in the future. He stated, "If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate. We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time." He also expressed a desire for economic growth to pick up in order to absorb the slack in the economy and return inflation sustainably to the 2% target.

Additional Observations from the Central Bank

The central bank made several other observations. They noted that excess supply in the economy continues to exert downward pressure on inflation, while price increases in shelter and certain other services are keeping inflation high. The governing council is closely monitoring these opposing forces on inflation. The bank also noted that the high shelter price inflation, which is currently the largest contributor to total inflation, is beginning to slow. Preliminary indicators suggest economic activity was soft through June and July. The Canadian Dollar has appreciated modestly, largely reflecting a lower USD and lower oil prices than assumed in the July monetary policy report. The Canadian labour market continues to slow, but wage growth remains elevated relative to productivity.

Market Reaction

Following the announcement, which was widely anticipated, the USDCAD fell to session lows.

Bottom Line

The Bank of Canada's decision to cut rates for the third consecutive month, with the possibility of further cuts, reflects the ongoing struggle to balance economic weakness and inflation. As the central bank continues to navigate these challenging economic waters, it will be interesting to see how these decisions impact the Canadian economy in the long term. What are your thoughts on this? Please share this article with your friends and let us know your views. Don't forget to sign up for the Daily Briefing, delivered every day at 6pm.