The Bank of Canada (BoC) cut its overnight rate by 25 basis points, to 4.25%, while stating that it will continue with Quantitative Tightening (QT).
The Bank noted the recent softening in economic data, affirming that “preliminary indicators suggest that economic activity was soft through June and July” and that “the labour market continues to slow, with little change in employment in recent months.”
The BoC seemed to view that inflation was under greater control, commenting that “as expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2 ½% and the share of components of the consumer price index growing above 3% is roughly at its historical norm.”
On the future path of policy, the bank has maintained its balanced rhetoric, stating “excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation.”
Key Implications
Another meeting, another cut. With inflation seemingly under control, the BoC can continue to cut rates as it focuses more on weakening trends in economic growth and the labour market. The unemployment rate has steadily moved higher over the last year, and layoffs are starting to take hold. And now that the central bank’s growth outlook for 2024 Q3 looks like a fantasy following last week’s GDP print, risks are mounting that the BoC is behind the curve.
Canadians should expect further rate cuts as the central bank’s policy stance is still at significantly restrictive levels (see our recent report). This is why we have another 175 bps in cuts cued up through next year. While the pace of cuts (25 bps per meeting) seems entrenched at the moment, the BoC has a long way to go to get monetary policy in line with the state of the economy.
