(Bloomberg) -- The Bank of Canada cut interest rates by a quarter percentage point for a third consecutive meeting, and reiterated that it’s “reasonable” to expect more easing to come if inflation keeps decelerating.
Policymakers led by Governor Tiff Macklem lowered the benchmark overnight rate to 4.25% on Wednesday, as widely expected by markets and economists in a Bloomberg survey.
Officials’ communications were little changed since their July meeting, and highlight the central bank’s increased focus on downside risks to inflation as they cut rates. They now see “little evidence” of broad-based price pressures.
The Canadian dollar rose by about 0.3% after the decision before paring back some gains. It was trading at C$1.352 per US dollar as of 1:20 p.m. Ottawa time. Canada’s two-year yield fell to a two-year low of 3.162%, down about eight basis points on the day.
Policymakers also reiterated they’re concerned about undershooting their 2% inflation target. “We need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” the governor said.
The communications reinforce officials’ shift in thinking about inflation — policymakers seem comfortable with gradually loosening monetary policy as they attempt to engineer a soft landing.
“We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time,” Macklem told reporters in a press conference after the announcement.
Still, Macklem said officials discussed multiple scenarios for the path of rate cuts moving forward, and they see both a pause in monetary easing and a cut by 50 basis points as potential options.
If there’s stronger-than-expected inflation or significantly less economic slack, it “might be appropriate” to slow the pace of easing, the governor told reporters. If the economy and inflation were markedly weaker than their forecasts “it could be appropriate to take a bigger step, something bigger than 25 basis points,” he said.
The rate decision statement was about half as long as July’s, and was “mostly a recitation of publicly-available facts,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, wrote in a report to investors.
“This blander approach might have been influenced by a desire to keep their cards closer to their chest ahead of employment data and a Fed rate decision in upcoming days,” he said, pointing to the Sept. 18 decision of the US central bank, where it’s also become clearer that Chair Jerome Powell will soon lower rates.
The bank restated there remains “a risk that upward forces on inflation could be stronger than expected” and officials say price pressures for shelter and other services are still “holding inflation up.” Policymakers also noted that so-called base effects “may bump up” inflation later in the year.
“We care as much about inflation being below the target as we do above,” Macklem said.
While the central bank acknowledged that the economy grew faster than expected in the second quarter, officials noted that was largely due to government spending and business investment. Officials also said there was “some downside risk” to the pickup in growth the central bank had forecast for the second half of 2024.
Economists surveyed by Bloomberg in August see the Bank of Canada cutting by a quarter percentage point at each of the next four meetings, with the policy rate falling to 3% by mid-2025. That would put it within the bank’s so-called neutral range, the estimated level at which interest rates neither slow nor stimulate the economy.
Wage growth in the absence of productivity gains remains an issue for the bank, but they expect compensation pressures to ease as the labor market weakens. “Business layoffs remain moderate, but hiring has been weak,” the bank said.
The bank didn’t meaningfully soften their focus or outlook, said Geoff Phipps, portfolio manager and trading strategist at Picton Mahoney Asset Management.
“Inflation risks were cited as two-way, despite progress made on inflation and deteriorating growth and jobs data,” he said in a report to investors.
In June, Macklem became the first Group of Seven central banker to launch into monetary easing, and the bank cut interest rates again in July.
Canadian consumers are feeling the pinch of higher borrowing costs, and per-capita household consumption is falling at a pace usually seen in recessions. Overall growth has been propped up by record immigration, and there’s a wave of mortgages that are set to renew at much higher levels.
--With assistance from Randy Thanthong-Knight and Jay Zhao-Murray.
(Updates market and economist reaction, adds comments from Macklem’s presser in the eighth and ninth paragraphs.)
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