Governor of the Bank of Canada Tiff Macklem, right, and Senior Deputy Governor Carolyn Rogers participate in a news conference on the bank's interest-rate announcement in Ottawa, on Sept. 4.Justin Tang/The Canadian Press
The Bank of Canada lowered its benchmark interest rate for a third consecutive time on Wednesday and reiterated that economic growth needs to pick up so that inflation doesn’t fall too much.
The central bank reduced its trend-setting policy rate to 4.25 per cent from 4.5 per cent, a widely anticipated move that followed quarter-point trims in June and July. Bank of Canada Governor Tiff Macklem said it is “reasonable to expect further cuts in our policy rate,” provided that inflation continues to ease generally in line with bank forecasts.
Inflation has cooled off substantially over the past two years, in part because higher interest rates have forced some households and businesses to curb their spending.
But in the final stages of their inflation fight, central bankers are worried about downside risks to the economy and the potential for inflation to overshoot the 2-per-cent target on the way down – concerns that were repeated on Wednesday after being raised at the July announcement.
“With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” Mr. Macklem said in the opening statement to Wednesday’s decision.
“We want to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the 2-per-cent target,” he added.
Investors are predicting a flurry of rate cuts in the months ahead. Interest-rate swaps, which capture market expectations of monetary policy, are pricing in five additional quarter-point cuts by June, 2025, according to Bloomberg data. That would take the central bank’s benchmark lending rate to 3 per cent.
Financial analysts have said it’s possible the Bank of Canada could deliver a half-point cut at one of its coming decisions, in the event that economic conditions weaken to a significant degree.
“If we need to take a bigger step, we’re prepared to take a bigger step,” Mr. Macklem said at a news conference after the rate announcement. “But at this point, 25 basis points looked appropriate.”
Shoppers cross Yonge-Dundas Square outside Eaton Centre in Toronto on June 5.Sammy Kogan/The Globe and Mail
The Bank of Canada gave a mixed assessment of the country’s recent economic performance.
On Friday, Statistics Canada reported that real gross domestic product grew at an annualized rate of 2.1 per cent in the second quarter – stronger than private-sector and BoC estimates. The central bank said the economy grew by around 2 per cent annualized in the first half of the year.
“That’s a healthy rebound from the near-zero growth we had in the second half of 2023,” Mr. Macklem said. According to its latest forecast from July, the bank expects GDP growth to further accelerate in the second half of 2024. However, “recent indicators suggest there is some downside risk to this pickup,” Mr. Macklem said.
Indeed, the economy is struggling on various fronts. Per-capita output has fallen for five consecutive quarters, and the unemployment rate has risen to 6.4 per cent from a low of 4.8 per cent. Real GDP stalled in June and July, according to early estimates from Statscan.
The Bank of Canada will update its economic projections at the Oct. 23 rate decision.
A sluggish economy is helping to tamp down price pressures. The Consumer Price Index rose at an annual rate of 2.5 per cent in July – way down from peak levels of around 8 per cent in mid-2022. The central bank expects inflation to make a sustainable return to 2 per cent next year.
But with the economy growing below its potential, there’s a risk that inflation could drift below the target.
“We expect the bank to continue grinding down rates in coming meetings, and, while we anticipate a series of 25 [basis point] steps into early next year, we certainly will not rule out a possible 50 [basis point] step at some point,” Bank of Montreal chief economist Doug Porter said in a client note. He added that “jobless figures have quickly become equally as important as the inflation data in the bank’s decision-making.”
Bank of Canada governor Tiff Macklem discusses the central bank's decision to lower its policy interest rate again. It marked the the third consecutive interest rate cut amid slowing inflation and weak economic activity.
The Canadian Press
Statscan will publish its Labour Force Survey for August on Friday. Job creation has slowed to a considerable degree, and this is making it especially tough for young people and recent immigrants to find work.
As they contend with higher interest rates, consumers have dialled back their spending. On a per capita basis, household spending fell in the second quarter – the sixth decline out of the previous eight quarters. Even with borrowing rates on the decline, many homeowners will be renewing their mortgages at higher interest rates in 2025 and 2026, which poses a risk to household finances.
“Household debt in Canada is quite high,” Mr. Macklem said. Many Canadians are “feeling the squeeze from higher interest rates and you can see it in the data.”
The U.S. Federal Reserve is likely to join the Bank of Canada by cutting interest rates for the first time of this cycle on Sept. 18. Fed chair Jerome Powell recently teed up a rate cut at the Jackson Hole economic conference in Wyoming. “The time has come for policy to adjust,” he said.
With the Fed heading into an easing cycle, Bank of Canada rates are unlikely to diverge any further from U.S. rates and put undue pressure on the Canadian dollar.
“We’re not seeing a big impact on our exchange rate,” Mr. Macklem said at the news conference. “The divergence has not run up against any limits to this point, and with markets now expecting the Fed to be easing, I don’t expect it’s going to come into play.”