The Bank of Canada (BoC) cut its overnight rate by 50 basis points, to 3.75%, while stating that it will continue with normalizing its balance sheet.
With inflation having “declined significantly” over the last few months, the bank said it “expects inflation to remain close to the target over the projection horizon.” Notably in the Bank’s Monetary Policy report (MPR), the quarterly forecast for core inflation is unchanged at +2%.
The bank highlighted the moderate pace of economic growth, stating “the economy grew at around 2% in the first half of the year and we expect growth of 1¾% in the second half. Consumption has continued to grow but is declining on a per person basis.” The Bank expected GDP growth to “strengthen gradually” over the coming quarters supported by lower interest rates.
On the future path of policy, the bank noted that “if the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further.” However, it also noted that the timing and pace of further reductions will be guided by the data.
Key Implications
Now that headline CPI inflation has dropped below the 2% target, the BoC has gained confidence that it can cut rates at a quicker pace. While there isn’t much in the way of a changing economic narrative – slow GDP growth and core inflation above 2% remain – the central bank is set on doing what it can to boost economic growth. Will a 50 bp move achieve this? Probably not, but the central bank felt it should do something with economic data continuing to show that the country is stuck in a rut. Hopefully we get a bit more clarity on this in the press conference.
This won’t be the end of rate cuts. Even with the succession of policy cuts since June, rates are still way too high given the state of the economy. To bring rates into better balance, we have another 150 bps in cuts penciled in through 2025. So while the pace of cuts going forward is now highly uncertain, the direction for rates is firmly downwards.
