Bank of Canada Cuts Rates for Third Time in a Row, Says Larger Rate Cuts Possible
Today’s rate cut marks the first time since the 2009 global financial crisis that the Bank of Canada has reduced interest rates three consecutive times.
The Bank of Canada (BoC) has once again lowered its key interest rate, marking the third consecutive cut in 2024, with the rate now set at 4.25%. The move, widely expected by economists, aims to address ongoing economic weakness while inflation shows signs of easing. However, BoC Governor Tiff Macklem has hinted that more aggressive interest rate cuts may be necessary if the economy continues to underperform.
The BoC’s decision comes amid persistent economic challenges. Growth in the second quarter exceeded expectations, rising by 2.1%, driven by increased government spending and business investment. However, economic activity stalled in June and July, raising concerns that third-quarter growth could fall short of the 2.8% annualized rate the bank had projected.
During today’s announcement, BoC Governor Tiff Macklem commented:
“We need to increasingly guard against the risk that the economy is too weak and inflation falls too much.”
This delicate balancing act between stabilizing inflation and supporting growth has driven the central bank’s recent policy shifts.
Inflation in Check But Economic Weakness Lingers
Inflation has been a central concern for the Bank of Canada throughout 2024, but recent figures suggest it is gradually moving closer to the bank’s 2% target. In July, the inflation rate dropped to 2.5%, down from 8.1% at its peak in June 2022. While inflationary pressures in areas like housing remain elevated, the overall trend shows signs of moderation.
Royce Mendes, head of macro strategy at Desjardins Group, noted the urgency in addressing the current economic slowdown, stating:
“With growth faltering instead of picking up as officials had forecast back in July, the risk is that central bankers will need to slash rates in October by 50 basis points instead of 25 basis points to spur a recovery.”
Despite easing inflation, high shelter costs continue to be a major contributor, with Macklem acknowledging that price increases in housing and certain services are “holding inflation up.” He also warned that inflation might rise again later in 2024 due to base-year effects, though he emphasized the bank’s focus on ensuring that inflation does not drop below target.
Job Market and Growth Concerns Mount
The Canadian labor market has shown signs of strain, with the unemployment rate climbing to 6.4% in June and July. The increase has disproportionately affected youth and newcomers to the country, contributing to concerns about the economy’s ability to absorb a growing workforce. While business layoffs have been moderate, weak hiring trends suggest that companies are cautious amid economic uncertainty.
Beata Caranci, Chief Economist at TD, highlighted the broader risks facing the economy, saying:
“We’re starting to see some of the cracks forming in the job market and on the consumer side.”
Caranci pointed out that while inflation is now near the BoC’s target, the risks of a deeper economic downturn are significant, particularly if growth remains sluggish.
Looking Ahead: More Rate Cuts on the Horizon?
With the next monetary policy decision set for October 23, the BoC will closely monitor economic data to determine its next steps. Financial markets are already pricing in a 93% chance of another 25-basis-point cut, though some experts believe a larger reduction may be on the table if conditions worsen.
Macklem reiterated that the BoC remains flexible, and prepared to adjust the pace of rate cuts depending on incoming data. “If we need to take a bigger step, we’re prepared to take a bigger step,” he said, leaving the door open for a more aggressive response if the economy shows further signs of weakness.
As Canada grapples with rising unemployment, slowing growth, and lingering inflationary pressures, the BoC’s policy trajectory will be crucial in determining whether the economy can regain its footing.
Canadian Stock Market Activity
Today’s news that the Bank of Canada cut interest rates for the third consecutive time had little effect on Canadian markets, with the TSX Composite Index ($TXCX) closing today’s trading session down 0.01% at 23,058.21.
The TSX Venture Composite Index ($JX) closed today at 552.41, down 0.48%. The CSE Composite Index ($CSEC) closed the day at 151.21, down 0.16%.
The Vanguard FTSE Canada All Cap ETF (VCN.TO), which tracks the performance of a broad Canadian equity index made up of large, mid and small-cap Canadian stocks, closed today up 0.06% at $47.11.
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