More interest rate cuts are coming, the Bank of Canada governor signaled after announcing a quarter-point cut to the key interest rate, which now stands at 4.25%.
“If inflation continues to moderate broadly in line with our July forecast, it is reasonable to expect further rate cuts,” Macklem said at a press conference following the rate cut announcement.
This third consecutive reduction in interest rates since June will give some breathing space to over-indebted households. It also aims to support a faltering economy. “Economic growth must accelerate,” believes the governor.
In response to questions, he said a 50 basis point rate cut had been considered by the bank’s board of governors, but there was strong consensus to limit the cut to 25 basis points. “If it’s necessary to cut rates more quickly, we’ll do it,” Macklem said.
The tone of the central bank’s latest message indicates that it is more concerned about the economic slowdown and the rising unemployment rate. Now that inflation is approaching the 2% target, the possibility that it will fall too much must be considered, the governor stressed.
He added that it is important to bring inflation back to target, but also that it stays on target.
The inflation rate fell to 2.5% in July. Housing prices, which include mortgage interest rates but also house prices, rent, insurance and maintenance costs, are still rising too fast, but the central bank expects this increase to slow.
The reduction in the number of temporary workers announced by governments and the increase in housing construction should ease tensions in the housing market, according to the central bank.
Most economists had anticipated the rate cut and expect more by year-end. Inflation has been within the central bank’s target range of 1% to 3% for seven straight months. Canada’s continuing slowdown in the economy and its unemployment rate, which has climbed to 6.7%, are factors that support additional rate cuts in the coming months.
In addition, the American Federal Reserve is preparing to start reducing its key rate, which will make life easier for the Bank of Canada, which does not want the rate gaps between the two countries to be too large.
The Bank of Canada’s next rate decisions are scheduled for October 23 and December 11.
Still insufficient
Most economists expect the remaining cuts to remain gradual, at a quarter-point, but a half-point reduction is not out of the question, said Doug Porter, BMO’s chief economist.
Despite three consecutive cuts, the key rate is still too high to stimulate an economic recovery, believes Randall Bartlett, senior director, Canadian economy, at Desjardins.
According to him, the Canadian economy is doing worse than the statistics indicate, and inflation could fall even more than the central bank predicts. An accelerated rate cut is therefore not to be excluded, he also believes.
Until its next decision, the Bank of Canada will have two labour market reports to digest, including the next one on Friday, and two readings of the Consumer Price Index to incorporate into its forecasts.