BoC Governor Macklem: A 25 bps Rate Cut Was Appropriate

Bank of Canada Governor Tiff Macklem held a press conference following the central bank’s third consecutive 25-basis point rate cut. Inflation may rise later in 2024, with potential for stronger-than-expected upward pressures. However, the overall weakness in the Canadian economy continues to drive inflation down. Recent data indicate some downside risk to the bank’s July projection of stronger growth in the second half of 2024. There is a growing need to guard against the risk of an overly weak economy causing inflation to fall too much.

If inflation continues to ease as per the July forecast, further rate cuts are likely. There was strong consensus for a 25 basis points cut, though various scenarios were discussed, including slowing the pace of cuts and a 50 bps cut. At this point, a 25 bps cut was deemed appropriate. If the economy were weaker than expected, a cut larger than 25 bps would be appropriate. There has been no significant impact on the exchange rate from divergence with the US Fed on rates. Canadian growth needs to exceed 2%, which is factored into policy decisions, and shelter inflation remains too high.

Following the Bank of Canada’s interest rate decision at 13:45 GMT, the key policy rate was reduced by 25 basis points to 4.25%, aligning with expectations. The bank expressed concerns that weaker-than-anticipated growth could lead to a sharper drop in inflation. Governor Macklem emphasized that with inflation nearing the target, the bank must be cautious about the risk of an overly weak economy causing inflation to decline excessively.

Market reaction

USD/CAD alternates gains with losses around the 1.3540 region, a tad lower than earlier weekly tops in the 1.3565-1.3570 band.