The Bank of Canada cut its benchmark interest rate by a quarter of a percentage point on Wednesday as the head of the central bank suggests the rate will need to move even lower to reignite the economy.
The Bank of Canada’s policy rate, which broadly informs the cost of borrowing across the country, now stands at 4.5 per cent.
The move was widely expected by economists as inflation continues to cool and the Canadian economy shows signs of weakness.
Bank of Canada governor Tiff Macklem said Wednesday that he expects inflation will continue to slow going forward even as the central bank forecasts economic growth picking up in the second half of the year.
“We are increasingly confident that the ingredients to bring inflation back to target are in place,” he told reporters after the announcement.
Macklem reiterated Wednesday that future rate decisions will come down to the latest economic data and how the Bank’s governing council expects that will affect the outlook for inflation.
“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate,” he said.
Macklem pushed back against some reporter questions on Wednesday seeking more clarity about whether interest rates will fall at each of the Bank of Canada’s three remaining decisions this year. He reiterated that with risks still out there that could push inflation higher, the central bank will be taking rate decisions one meeting at a time.
“The expected direction of our policy rate is lower, but we’re not on a predetermined path,” he told reporters.
CIBC chief economist Avery Shenfeld said in a note to clients Wednesday morning that the message from the Bank of Canada is that there’s room for more interest rate cuts in upcoming decisions.
“That opens the door to a further cut in September,” he said, adding CIBC expects a fourth consecutive cut in October to bring the policy rate to 4.0 per cent.
BMO chief economist Doug Porter said in a note Wednesday that he also expects two more rate cuts over the remaining three decisions this year. Whether the central bank continues to cut in September or takes a pause depends on how inflation data behaves, as well as any signs of weakness bubbling up in the jobs market.
“The tone of today’s many remarks almost seems to suggest that the Bank now needs to be convinced not to keep trimming rates,” Porter said.
Money markets are expecting one more 25-basis-point cut this year and see a 53 per cent chance that the Bank of Canada will cut rates again in its next monetary policy decision on Sept. 4, according to Reuters.
Where does inflation head next?
The second rate cut in as many months will be felt immediately by Canadians carrying debt with variable rates of interest, including some mortgages and home equity lines of credit.
Heading into the rate decision, many Canadians were clamouring for relief, recent polling suggested. The MNP Personal Debt Index released this week shows 66 per cent of respondents “desperately” needed another interest rate cut as debt costs mounted.
Macklem acknowledged the pinch households are facing and said that a downward path for interest rates will bring a modicum of relief for Canadians.
“This isn’t a huge change but … it means that the cost of carrying debt is going down. Canadians will have more income left for other things,” he said Wednesday.
The Bank of Canada’s interest rate easing cycle kicked off in June with a 25-basis-point cut.
Since the central bank began raising its policy rate in March 2022, elevated interest rates have ratcheted up borrowing costs for many Canadians, businesses and governments, discouraging spending in a bid to cool decades-high levels of inflation.
While much of the Bank of Canada’s messaging in its ongoing inflation fight has focused on factors that could reignite inflation pressures, communications on Wednesday included a notable shift giving more weight to downside risks.
Tu Nguyen, economist with RSM Canada, tells Global News that the change in tone from hawkish — leaning towards keeping rates higher — to dovish and more cuts to come was the starkest part of the central bank’s statements on Wednesday.
Rather that worrying that progress in taming inflation would stall, Nguyen says the Bank of Canada now seems confident that price pressures will come down and is now focused on avoiding the worst outcomes for the economy.
“It seems like we’re going to get to two per cent (inflation) in 2025, as long as there are no surprises, even with more rate cuts for the rest of the year,” she says.
Macklem noted in his remarks that the central bank wants to see economic growth pick up “so inflation does not fall too much” and overshoot the mandated target of two per cent.
“Remember, in general our inflation targeting framework is symmetric. We are equally concerned about being below target as we are about being above target,” he told reporters on Wednesday.
Shenfeld’s read of Macklem’s statement is that the Bank of Canada is looking to stimulate the economy with lower interest rates even as it expects price pressures to ease further.
Inflation cooled to 2.7 per cent in June, a move that many economists said helped seal the deal for back-to-back rate cuts.
Despite expectations that price pressures will continue to cool, the Bank of Canada revised up its forecast for where inflation will land by the end of this year in an updated Monetary Policy Report also released Wednesday.
Annual inflation is now expected to average out to 2.4 per cent in the fourth quarter of 2024, compared to April’s calls for 2.2 per cent. Inflation is now expected to be slightly below previous estimates by the ends of 2025 and 2026, coming in exactly at the central bank’s two per cent target.
Macklem acknowledged Wednesday that there are likely to be “setbacks” on the way to two per cent inflation.
He noted that inflation still runs hot in the shelter component as many Canadians face rising rents and steep costs on their mortgage renewals. Wage growth, another area the Bank of Canada has said it’s watching, remains elevated but has shown signs of easing lately, the central bank noted.
Macklem said that interest rates need to remain “restrictive,” but it’s clear monetary policy doesn’t have to be as tight as before to keep inflation on its cooling path.
Coming off weaker-than-expected growth in the first quarter, the Bank of Canada is anticipating the Canadian economy will rebound in the third quarter of this year, the MPR shows. Real gross domestic product is forecast to grow at an annualized rate of 2.8 per cent this quarter, up from expectations of 1.5 per cent in the second quarter.
— with files from Global News’ Anne Gaviola and Reuters