On Wednesday, the Bank of Canada made headlines by reducing its key overnight lending rate for the third consecutive time. This latest cut, which drops the rate to 4.25%, continues the pattern set in June and July, and reflects the Bank's ongoing efforts to navigate a challenging economic landscape.
Why the Cut?
Bank of Canada Governor Tiff Macklem has been clear about the central bank’s priorities. The primary goal is to steer inflation toward its 2% target and keep it there. Macklem reiterated this commitment, stating, “We are determined to get inflation down to the two per cent target, and we want it to stay there.” He also highlighted the need to manage the risks associated with both high and low inflation, suggesting that further rate cuts could be on the horizon if inflation trends continue to align with their goals.
Current Economic Climate
Several factors are driving these rate cuts:
Inflation Trends: As of July, overall inflation has eased to 2.5%. This is a promising sign, particularly since shelter inflation—the cost of housing—has been rising at a slower pace. These developments support the Bank’s decision to lower rates further.
Labour Market Weakness: Recent data show a weakening labor market. Although the economy grew in the second quarter, real GDP per capita has declined, indicating underlying economic struggles.
Economic Forecasts: According to Benjamin Reitzes of BMO, the economic backdrop suggests that policy rates should remain below neutral, which could lead the Bank of Canada to continue its rate-cutting trajectory into 2025.
What’s Next?
Looking ahead, there are a few key points to watch:
Employment Data: Statistics Canada is set to release August’s employment numbers this Friday. If the jobless rate increases more than anticipated—Reitzes forecasts a rise to 6.5%—it could prompt the Bank to implement more aggressive rate cuts in 2024.
Upcoming Announcements: The Bank of Canada has two more rate announcements scheduled for this year, in October and December. Economists are predicting that these meetings will also result in quarter-percentage-point cuts, potentially bringing the overall key rate to 3.75% by year-end.
Future Rate Cuts: Stephen Brown from Capital Economics suggests that while the Bank might consider a larger half-percentage-point cut in the future, this would likely depend on further progress in core inflation.
In Conclusion
The Bank of Canada’s recent rate cuts reflect its ongoing commitment to managing inflation while supporting economic growth. With inflation trending downwards and economic indicators showing mixed signals, the central bank’s approach will be crucial in navigating the current economic landscape. Keep an eye on upcoming employment data and future rate announcements to gauge how these factors might influence the Bank’s next moves.
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