As expected, the Bank of Canada is cutting its key interest rate by a quarter of a percentage point, lowering it from 4.75% to 4.5%.
This is another respite for borrowers.
This is the second rate cut since June, when it peaked at 5% after a period of sharp increases in order to extinguish the post-pandemic inflation surge.
Highly anticipated, this other reduction in the key rate by the Bank of Canada comes following a recent sequence of indications of a clear slowdown in the Canadian economy: rising unemployment, falling retail sales, falling inflation.
In his prepared statement, Bank of Canada Governor Tiff Macklem noted that as inflation moves closer to its target, the central bank is also trying to avoid the risk of a more severe than expected weakening of the economy and inflation.
However, he stressed that the return to 2% inflation would probably not be a straight line.
“The broad weakness in the economy is pushing inflation down. But at the same time, pressures on housing costs and prices of other services are hampering its decline,” Macklem said.
Although the governor said Bank of Canada officials are “increasingly confident that the ingredients needed to bring inflation back to target are in place,” tensions between these opposing forces could affect the pace at which price growth slows.
“If inflation continues to moderate in a manner broadly consistent with our forecast, it is reasonable to expect further rate cuts. The timing of those cuts will depend on how we think these countervailing forces will evolve,” he said.
“In other words, we will take our monetary policy decisions one at a time,” he added.
The Bank of Canada announced its first rate cut in four years last month, marking a major turning point in its fight against high inflation.
High borrowing costs have caused a decline in consumer and business spending, which economists say has helped ease pressure on price growth.
Canada’s annual inflation fell back to 2.7% in June after a temporary acceleration in May.
The Bank of Canada’s monetary policy report released Wednesday includes new forecasts, which suggest inflation will return to the 2% target next year.
The Canadian economy, which the central bank says remains weak relative to population growth, is expected to strengthen in the second half of 2024.
Real gross domestic product is expected to grow by an average of 1.2% this year, followed by 2.1% in 2025.
The central bank’s next interest rate decision is scheduled for September 4.
With The Canadian Press