After Rate Cut, BoC’s Macklem: Monetary Policy Still Restrictive

In an effort to reduce price pressure and depress economic conditions, the Bank of Canada has lowered its benchmark interest rate for the second time in a row. Weakening economic circumstances and lessening pricing pressures led the central bank to decide to cut its policy rate by a quarter of a percentage point. Right now, the key interest rate is 4.5%.

As inflation approaches its target, the central bank is working to minimize the possibility that both inflation and the economy would contract more than anticipated, as Governor Tiff Macklem pointed out. The return to 2% inflation, though, is probably not going to happen in a straight line. Price pressures for housing and certain other services are keeping inflation high, while the economy’s general weakness is bringing inflation down.

Although the Bank of Canada is “increasingly confident” that inflation is returning to target, the rate at which price increase slows down may vary depending on the dynamics at play. It is plausible to anticipate additional policy interest rate reductions if inflation keeps decreasing broadly in accordance with the forecast. September 4 is when the Bank of Canada is expected to make its next interest rate decision.

The press conference by Governor Tiff Maclem is taking place in tandem with the publication of the BoC’s Monetary Policy Report. Regarding the pertinent price action, on Wednesday, USD/CAD broke below the 1.3800 level as the Canadian dollar continues to weaken and reaches three-month lows against the US dollar. As of this writing, the pair is trading at 1.3784.

At its monetary policy meeting on Wednesday, the Bank of Canada (BoC) made two consecutive 25 basis point interest rate cuts, aligning with the expectations of the market. As a result, the policy rate was lowered to 4.50% from 4.75%.

The BoC lowered its growth estimate for 2024 and attributed the change to lower consumption. Furthermore, the bank restated its forecast that inflation will steadily return to its target of 2% in the second half of 2025.

In its quarterly monetary policy report, the central bank projected 2024 growth at 1.2% (vs. 1.5% forecasted in April). Additionally, the BoC noted a decline in consumption, driven by reduced demand for motor vehicles and foreign travel, as well as households dedicating a larger portion of their income to debt payments.

The first-quarter GDP growth estimate was 1.7% annualized, which was far less than the 2.8% growth forecast in April. The central bank added that base-year effects on gasoline prices are one reason why total inflation is predicted to decline below core inflation in the second half of 2024. By the first half of next year, this effect will be lessened, and by the second half of 2025, inflation is expected to settle at 2%.

Key Quotes

We don’t need more excess supply.

We need growth and job creation to start picking up.

We’re not on a predetermined rate path.

We will make decisions on a meeting-by-meeting basis.

Decisions on interest rates will be based on incoming data.

There was a clear consensus to cut by 25 bps.

We don’t think we’re at a normalized state on our balance sheet yet.

Monetary policy is still restrictive.

We don’t want to weaken the economy too much and have inflation go below our 2% target.