Third Time Is A Charm? Bank Of Canada Cut Rates Again Amid Cooling Inflation; What To Expect Ahead?

Bank of Canada does it again, cutting key interest rates by 25 basis points for the third consecutive policy, which is also the highest trim since the global financial crisis of 2009. On September 4, the Bank of Canada reduced its target for the overnight rate to 4¼%, with the Bank Rate at 4½% and the deposit rate at 4¼%. It said the Bank is continuing its policy of balance sheet normalization.

In its note, the central bank highlighted that the global economy expanded by about 2½% in the second quarter, consistent with projections in the Bank's July Monetary Policy Report (MPR). In the United States, economic growth was stronger than expected, led by consumption, but the labour market has slowed. Euro-area growth has been boosted by tourism and other services, while manufacturing has been soft.

Also, it added, that inflation in both regions continues to moderate. In China, weak domestic demand weighed on economic growth. Global financial conditions have eased further since July, with declines in bond yields.

Meanwhile, the Canadian dollar has appreciated modestly, largely reflecting a lower US dollar. Oil prices are lower than assumed in the July MPR, it said.

In terms of the economy in Canada, it grew by 2.1% in the second quarter, led by government spending and business investment. The Canadian central bank said, this was slightly stronger than forecast in July, but preliminary indicators suggest that economic activity was soft through June and July.

Moreover, as per the bank, the labour market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity.

Coming to inflation, the Canadian central bank stated that as expected the indicator has slowed further to 2.5% in July.

According to the central bank, the Bank's preferred measures of core inflation averaged around 2 ½% and the share of components of the consumer price index growing above 3% is roughly at its historical norm. High shelter price inflation is still the biggest contributor to total inflation but is starting to slow. Inflation also remains elevated in some other services.

Looking ahead, Canadian central bank said, "Excess supply in the economy continues to put downward pressure on inflation, while price increases in 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."

The latest rate cut by Bank of Canada is on expected lines. According to Trading Economics, the Bank of Canada cut its key interest rate by 25bps to 4.25% in its September 2024 meeting, as expected, to mark the third consecutive 25bps slash after having left the hiking cycle's terminal rate of 5% for 10 months. The central bank noted that the extension of its cutting cycle was warranted as excess supply in the Canadian economy continued to put downward pressure on inflation. Additionally, policymakers reiterated some concerns about undershooting inflation targets, adding to their worries of overtightening. Also aligning with the need for looser financial conditions, the Governing Council noted that the labor market continued to slow in recent months, although wage growth remains elevated when compared to productivity. Still, the central bank noted that inflation remains elevated for shelter and selected services, noting that upside risks to price growth are also present.