• After a first interest rate cut in June, the Bank of Canada again lowered its key overnight rate by 25 basis points at its meeting today, to 4.5%. The move was in line with market and our own expectations ahead of the announcement.
  • Governor Macklem’s opening statement for the press conference was more dovish than the rate announcement. The governor highlighted a reasonable expectation for future rate cuts should inflation continue to ease in line with BoC’s forecast. He also discussed the balance of risk to inflation, and highlighted an increase in weight to the downside.
  • On the downside, the BoC focused on the state of the Canadian economy, more specifically increased excess supply as indications that inflation pressures should continue to unwind.
  • Indeed, growth in the economy is expected to have decelerated again in the second quarter after slowing in Q1, leaving a bigger gap with potential GDP growth that’s still propped up by the rise in population. Although the BoC expects the government’s target on non-permanent residents should reduce population growth in 2025.
  • On the upside, the BoC highlighted several corners in the consumer basket that are still seeing elevated inflation, including shelter and other services (dining out at restaurants and personal care) that are labour heavy and therefore more closely affected by elevated wage growth.
  • On each of those pressure points there have been early evidence that inflation’s unwinding. Growth in rent prices especially in major markets appeared to have ground to a halt into the summer. CPI growth due to mortgage interest costs should slow naturally as interest rates decline. Finally, progressively weaker labour markets and businesses’ sentiment were all for wage growth to keep normalizing in the year ahead.
  • Moving forward and similar to our own forecast, the BoC expects unwinding in price pressures will persist and economic conditions in Canada will gradually improve. The BoC’s forecast is for their preferred core inflation measures to slow to 2.5% over the second half of 2024 from 2.7% in Q2, and slow further to reach the 2% target in 2025.

Bottom line:

The interest rate cut today from the Bank of Canada marks a continuation in the central bank’s effort to lower interest rates back towards “normal” levels, amid signs of slowing inflation. The BoC highlighted parts of the economy that are still seeing abnormally high pressure in price growth, but also thinks a weaker economic and labour market backdrop, as well as increased excess supply should continue to propel inflation back towards the target level this year and next. Against that backdrop, our expectation remains that there will be two additional rate cuts this year, one at each meeting after today’s meeting that will lower the overnight rate to a still restrictive 4% by the end of 2024.

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