Bank of Canada Cuts Interest Rates, Signals Possible Further Cuts

Strategic Insights -

Bank of Canada Governor Tiff Macklem highlighted the central bank's focus on keeping inflation close to the 1-3% inflation-control band, amidst concerns about weak economic growth and a softening labour market. The recent interest rate cuts have been welcomed, but some analysts argue that more substantial reductions are needed to avoid an economic downturn. As the bank's preferred measures of core inflation averaged 2.4% in August, Macklem emphasized the need for a slowdown in shelter price inflation and measures of core inflation.

Key Takeaways:

  • The Bank of Canada has cut interest rates by a quarter-percentage point at three consecutive meetings since June, bringing the policy rate to 4.25%.
  • Governor Tiff Macklem expressed concerns about weak economic growth and a softening labour market, which could cause inflation to undershoot 2% on the way down.
  • The bank's preferred measures of core inflation averaged 2.4% in August, with a need for a slowdown in shelter price inflation and measures of core inflation.
  • Financial markets now put the odds of a half-point cut at the next meeting on Oct. 23 at around 60%, according to LSEG data.
  • Interest-rate swap markets expect the bank's policy rate to end the year at 3.5%.
  • Desjardins economist Tiago Figueiredo believes the Bank of Canada will ease policy rates by 50 basis points in October.
  • Canada's economy continues to grow, but restrictive monetary policies are taking a toll on consumer spending and business investment, with GDP and consumer spending per person declining.

Statistics:

  • The Bank of Canada's policy rate is currently at 4.25%.
  • The bank's preferred measures of core inflation averaged 2.4% in August.
  • Interest-rate swap markets expect the bank's policy rate to end the year at 3.5%.
  • Financial markets now put the odds of a half-point cut at the next meeting on Oct. 23 at around 60%, according to LSEG data.
  • The unemployment rate has risen nearly two percentage points over the past year to 6.6% in August.
  • Arrears on mortgages have risen in recent quarters, but remain below prepandemic levels.

Sources:

  • Globe and Mail article by [author], published on [no date mentioned in the text], citing Bank of Canada Governor Tiff Macklem's remarks.
  • LSEG data cited in the article, showing a 60% probability of a half-point rate cut at the next meeting.
  • Desjardins economist Tiago Figueiredo's note to clients, referenced in the article, predicting a 50-basis-point rate cut in October.
  • Statistics Canada data, cited in the article, showing the annual Consumer Price Index in August was on target for the first time since early 2021.