Meeting follows a cut in June and further evidence of economic slowdown
The bank of Canada has announced it will cut its key interest rate by 0.25 per cent following the conclusion of its meeting today.
This follows an equivalent cut in June and brings the Bank of Canada’s policy interest rate to 4.5 per cent.
In the past month, CPI data, consumer and business outlook surveys, and unemployment prints have all pointed to a Canadian economy that is slowing. Inflation now appears to be falling closer to the Bank of Canada’s two per cent target, though it remains somewhat elevated at 2.7 per cent as of June.
“With broad price pressures continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 basis points,” a press release accompanying the decision reads. “Ongoing excess supply is lowering inflationary pressures. At the same time, price pressures in some important parts of the economy—notably shelter and some other services—are holding inflation up.
“Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.”
This cut was largely priced in by markets and predicted by analysts ahead of the BoC meeting. The business and consumer outlook surveys released earlier in July showed that both groups see the economy slowing. Canada may have managed to negotiate a soft landing in pure economic terms, but consumers and businesses are both feeling the impacts of a slowing economy and higher interest rates.
One area of concern is that cuts by the Bank of Canada are outpacing the United States Federal Reserve, which has not cut interest rates yet. Dustin Reid, chief fixed income strategist at Mackenzie Investments, recently told WP that the Bank of Canada can tolerate a roughly one per cent divergence from Fed interest rate policy.
The Federal Reserve meets next week, with markets pricing in another hold. Expectations are that Fed Chair Jerome Powell will announce a first cut following the Fed’s September meeting.
“In the United States, the anticipated economic slowdown is materializing, with consumption growth moderating. US inflation looks to have resumed its downward path,” the release reads. “Global financial conditions have eased, with lower bond yields, buoyant equity prices, and robust corporate debt issuance. The Canadian dollar has been relatively stable and oil prices are around the levels assumed in April’s Monetary Policy Report (MPR).”
