Bank of Canada Faces Easier Inflation Pressures

Citing greater comfort with the inflation outlook and slack in the labor market, the Bank of Canada cut interest rates by a quarter of a percentage point.

The cut, announced Wednesday, marks the second consecutive meeting at which the central bank lowered rates, and economists see room for more cuts ahead.

“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,” the BoC said in its announcement. “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.”

With the July rate cut, which economists had largely expected, the BoC’s key overnight rate target was lowered to 4.5%. Prior to the June meeting, the overnight rate had been at 5% since July 2023.

Will the Bank of Canada Cut Rates Again?

“As expected, the Bank of Canada decided to cut rates by 25 basis points today to 4.5%, particularly after inflation continued to move towards target, labor markets continued to show slack, and unemployment rose to 6.4%” says Ashish Dewan, senior investment strategist at Vanguard Canada. “The latest growth numbers met expectations, and there doesn’t seem to be signs of a reacceleration in growth which could have contributed to a delay in rate cuts.”

Dewan thinks the BoC will likely cut rates again one more time this year: “As inflation continues its progress, growth sustainability and mortgage renewals at higher rates will be top of mind.”

In its announcement, the BoC noted that economic growth likely ticked higher to about a 1.5% rate in the first half of 2024. However, “with robust population growth of about 3%, the economy’s potential output is still growing faster than GDP, which means excess supply has increased.” At the same time, officials said, household spending has been “weak” and “there are signs of slack in the labor market.”

Rate Cut Comes as Inflation Pressures Ease

Critically, “broad inflationary pressures are easing,” the central bank said in its statement, pointing to a moderating in Canada’s Consumer Price Index to 2.7% in June. The Bank’s preferred measures of core inflation have been below 3% for several months, and the breadth of price increases across components of the CPI is now near its historical norm.

Looking ahead, the BoC said it expects its preferred measures of core inflation to slow toward 2.5% in the second half of 2024 and “ease gradually through 2025,” thanks in part to gas price prices.

Source link