Bank of Canada cuts key interest rate for second consecutive time, bringing overnight rate to 4.5% #CanadaFinance
CashNews.co
In June the Bank of Canada became the first G7 nation to cut rates in more than four years. 2024. REUTERS/Blair Gable (REUTERS / Reuters)
The Bank of Canada cut its benchmark interest rate by 25 basis points to 4.5 per cent on Wednesday, its second consecutive reduction, and signaled more cuts could be ahead if inflation continues to ease.
The Bank also took on a more dovish tone, economists noted, with Governor Tiff Macklem flagging that downside risks to the economy are taking on more weight in the bank’s future rate decisions.
“In recent months, we have continued to make progress bringing inflation down. With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations,” Macklem said in a prepared opening statement.
“We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2 per cent target.”
Economists had widely expected the central bank to cut its key rate in the wake of slowing inflation, rising slack in the labour market and weak economic growth. The Bank of Canada noted in a statement Wednesday that excess supply in the economy has increased, household spending has been weak, the labour market has shown signs of slack, and broad inflationary pressures are easing.
Macklem reiterated several times during a press conference on Wednesday that “it is reasonable to expect further cuts going forward,” but that the bank is “not on a predetermined path.”
“(The) timing is going to depend on incoming data, and importantly what the data tells us about where inflation is headed,” he told reporters.
Inflation progress ‘will likely be uneven’
Macklem noted that while the central bank expects inflation to moderate further, progress over the next year “will likely be uneven.” The Bank of Canada also released its quarterly Monetary Policy Report (MPR) on Wednesday, and said it expects inflation to fall to 2.3 per cent in the third quarter of the year and hit 2.4 per cent in the fourth quarter. The central bank said inflation will settle “sustainably” at 2 per cent in the second half of 2025.
Opposing forces are affecting inflation, Macklem noted, with weakness in the economy pulling it down while high prices for shelter and in some services push inflation up.
“We are increasingly confident that the ingredients to bring inflation back to target are in place. But the push-pull of these opposing forces means the decline in inflation will likely be gradual, and there could be setbacks along the way,” Macklem said.
The emphasis on the potential downside risks to inflation mark a notable shift in language for the Bank of Canada, which stressed during its last monetary policy decision in June that cutting rates too quickly could jeopardize progress made on lowering inflation.
Some analysts pull forward forecast for cuts to September
“[While] Governing Council didn’t provide any explicit guidance about what comes next, there’s a strong sense that policymakers feel an urgency to continue the rate cutting cycle in September,” Desjardins senior director of Canadian economics Randall Bartlett wrote in a research note.
“The dovish language in the releases paints a picture of officials who are growing more worried about the likelihood of recession. As a result, we are pulling forward our rate cut expectations to forecast another move in September.”
BMO Capital Markets chief economist Douglas Porter said a September cut is “very much on the table” if the next core inflation print shows continued downward momentum.
“The tone of today’s remarks almost seems to suggest that the Bank now needs to be convinced not to keep trimming rates,” Porter wrote in a research note.
“We continue to look for two more rate cuts before the end of 2024, taking the overnight rate down to 4 per cent, with the precise timing over the next three meetings driven by the incoming data — with CPI on centre stage, but the unemployment rate now dancing close to the limelight as well.”
Money markets see a 53 per cent chance that the Bank will cut rates again at its next interest rate announcement on Sept. 4, according to Reuters, and are factoring in just one more 25-basis point cut in 2024, which would bring the policy rate to 4.25 per cent.
While the Bank expects economic growth to pick up in the second half of the year, with real GDP hitting 2.8 per cent in the third quarter, it cut back its 2024 economic growth forecast to 1.2 per cent from the 1.5 per cent forecast in April. The Bank noted that growth remains weak relative to population growth. Pent-up demand for vehicles and travel has slowed, and households are using more of their income to service debt payments, leaving less money for discretionary spending.
Wednesday’s decision marks the second consecutive cut from the Bank of Canada. The central bank cut rates in June for the first time in four years, the first G7 central bank to do so since the pandemic, marking a turning point in one of the most aggressive tightening cycles in the central bank’s history.
Watch the press conference with Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers below.
Follow Yahoo Finance Canada’s live coverage of the Bank of Canada’s interest rate cut, and what it will mean for Canadians.
LIVE COVERAGE IS OVER38 updates
Canadian banks lower prime rates following BoC cut
Canada’s biggest banks reduced their prime rates after the Bank of Canada cut interest rates for the second time in a row.
RBC, BMO, TD, Scotiabank and CIBC each lowered their prime rates by 25 basis points, from 6.95 per cent to 6.7 per cent.
The prime rate is the annual interest rate that banks and financial institutions use to set interest rates for variable-rate mortgages, lines of credit, and some other loans.
Royal Bank the first to decrease its prime rate
FILE PHOTO: A sign for the Royal Bank of Canada in Toronto, Ontario, Canada December 13, 2021. REUTERS/Carlos Osorio/File Photo (Reuters / Reuters)
RBC Royal Bank decreased its prime rate by 25 basis points following the Bank of Canada’s rate cut, bringing it to 6.7 per cent from 6.95 per cent. The new rate is effective July 25.
The other major banks are expected to follow suit.
What’s ahead for the loonie?
The loonie reaction to the Bank of Canada’s decision to cut rates for the second time in a row was muted on Wednesday, but TD Bank Group senior economist Rishi Sondhi told the Canadian Press that’s because the move was already priced in.
The Canadian dollar did dip briefly after the rate decision was released, but recovered after the press conference to around 72.52 U.S. cents, CP said.
As for what’s ahead for the loonie, Sondhi told CP that the Canadian dollar should hold around where it’s been trading for the rest of the year because both the Bank of Canada and U.S. Federal Reserve will be cutting rates.
Read more about what the Bank of Canada’s rate drop means for the loonie here.
Next cut in September? Where economists stand on future cuts
(Photo by Blair Gable/REUTERS) (REUTERS / Reuters)
BoC governor Tiff Macklem was predictably noncommittal when it came to the timing of future cuts, coming closest when he said that if inflation behaves as expected, “it is reasonable to expect further cuts in our policy rate — but we’re not on a predetermined path.”
Economists at many Canadian financial institutions offered their forecasts, however.
Douglas Porter, economist, BMO
On a September cut: “September is very much on the table if the next core CPI print behaves (think +0.2% m/m or lower).”
Forecast for 2024: “We continue to look for two more rate cuts before the end of 2024, taking the overnight rate down to 4%, with the precise timing over the next three meetings driven by the incoming data.”
Avery Shenfeld and Andrew Grantham, economists, CIBC
On a September cut: Yes.
Forecast for 2024: “Weaker growth and continued easing in inflation will likely bring two further interest rate cuts in September and October, to end the year at 4.00%. ”
Randall Bartlett, economist, Desjardins
On a September cut: Yes.
Forecast for 2024: “We now expect the Bank of Canada to reduce rates in September and then again in October before pausing in December to assess how lower rates are impacting the economy and inflation.”
Dominique Lapointe, director of macro strategy, Manulife Investment Management
On a September cut: Yes.
Forecast for 2024: “In conjunction with the narrow path to deliver a soft landing, we now expect the BoC to cut at every remaining meeting this year, leaving the overnight rate at 3.75% in December 2024.”
National Bank
On a September cut: Will depend on Aug. 20 CPI data.
Forecast for 2024: TBD. Before today’s cut, they expected a pause in September and cuts in October and December.
Claire Fan, economist, RBC
On a September cut: Yes.
Forecast for 2024: “Our expectation remains that there will be two additional rate cuts this year, one at each meeting after today’s meeting that will lower the overnight rate to a still restrictive four per cent by the end of 2024.”
Lingering inflation risks mean a single further cut likely in 2024: Vanguard
The mortgage renewal situation made today’s rate cut particularly necessary, said Ashish Dewan, a senior investment strategist at Vanguard Canada. Without some relief, people who had “some of the lowest rates in history” five years ago would face a significant reduction in their purchasing power, he said.
However, ongoing inflation sensitivity means Vanguard expects only one further cut this year, Dewan said. “Particularly if you think of rents — they might not come down as much,” he said. “So there’s that risk of inflation not coming down much because of the shelter component, and also the sticky services component and wages particularly.”
‘Aggressive’ rate cuts needed to revive real estate market: President of Right at Home Realty
(Photo by Roberto Machado Noa/LightRocket via Getty Images) (Roberto Machado Noa via Getty Images)
Today’s 0.25 per cent cut might generate “a limited blip in movement” on the real estate market, but it’s not likely to do much more, says John Lusink, President of Right at Home Realty, who called for far deeper cuts.
“While a cut is of course a step in the right direction, less is not more,” he wrote in a note to Yahoo Finance Canada. “A 0.5 [percentage point] reduction would have stimulated the market more meaningfully.”
Lusink said “more aggressive rate cuts – hopefully upwards of another 1 point before the end of the year” would be necessary to draw out buyers and also revive the pre-construction market.
August’s CPI data release will be key: National Bank
Taylor Schleich and Jackson Atkinson at National Bank Financial Markets also observed an overall dovishness in today’s announcement, but are on the fence about a September cut. They say a pause in September — their expectation before today — is still possible, but that “incoming inflation data is most likely to be the deciding factor.”
“If core inflation returns to January-April type readings and the real economy remains sluggish, we can probably expect a cut,” they write. “If inflation looks more like it did in May or June, the BoC may want a bit more time to assess.”
July CPI data comes out on August 20 — “circle your calendar,” they write.
Some economists now expect a third cut in September
Before the Bank of Canada issued its July interest rate decision, some economists had expected that the central bank would pause in September and assess the impact of its cuts.
But with Governor Tiff Macklem flagging that downside risks are taking on more weight in the central bank’s monetary policy deliberations, some of those economists have moved up the timing of the next cut to September.
“We continue to anticipate two more 25 (basis point) cuts before the end of the year, but now expect those to come in September and October (rather than October and December previously),” CIBC economists Avery Shenfeld and Andrew Grantham wrote in a note.
Desjardins also moved up its rate cut call, saying that the “dovish language in the releases paints a picture of officials who are growing more worried about the likelihood of recession.”
“And while Governing Council didn’t provide any explicit guidance about what comes next, there’s a strong sense that policymakers feel an urgency to continue the rate cutting cycle in September,” Desjardins’ senior director of Canadian economics Randall Bartlett wrote in a research note.
“As a result, we are pulling forward our rate cut expectations to forecast another move in September. We now expect the Bank of Canada to reduce rates in September and then again in October before pausing in December to assess how lower rates are impacting the economy and inflation.”
The Bank of Canada strikes a more dovish tone
Many economists noted the Bank of Canada has taken a more dovish tone with this latest interest rate cut.
“The tone of the statement and the accompanying Monetary Policy Report was again more dovish than we would have expected —albeit the Bank also needed to justify the rate cut — with lots of discussion around downside risks, and nods to a softening job market and gradual progress in dampening core inflation,” BMO Capital Market chief economist Douglas Porter wrote in a research note. He added that the “truly dovish” remarks were in Governor Tiff Macklem’s speech, when he flagged that downside risks were taking on more weight in policy deliberations.
“The tone of today’s many remarks almost seems to suggest that the Bank now needs to be convinced not to keep trimming rates,” Porter wrote.
Royce Mendes, Desjardins managing director and head of macro, said in a research note that “the dovish language in the releases paints a picture of officials who are growing more worried about the likelihood of recession.”
“As a result, we are pulling forward our rate cut expectations to forecast another move in September,” Mendes wrote.
“We now expect the Bank of Canada to reduce rates in September and then again in October before pausing in December to assess how lower rates are impacting the economy and inflation.”
Expect 2 more cuts this year: RBC
Macklem’s opening remarks were more dovish than the tone of the actual rate announcement, said RBC economist Claire Fan, who said that the BoC’s forecasts were largely in line with RBC’s.
Overall, today’s events left RBC’s projections unchanged.
“Our expectation remains that there will be two additional rate cuts this year, one at each meeting after today’s meeting that will lower the overnight rate to a still restrictive four per cent by the end of 2024,” Fan wrote.
More cuts needed for meaningful impact: Morguard
Keith Reading, a senior director of research at real estate firm Morguard, says this latest cut “won’t be overly impactful,” with interest rates still restrictive. Commercial real estate tenants, developers and owners rely on low-cost debt, he writes, so activity in that sector “will remain muted.”
Investment sales will also remain slow, and the expectation of further interest rate cuts means “interest rate-sensitive buyers will remain on the sidelines” for now, he says.
Macklem’s message to Olympians: ‘Go for the gold’
Macklem wrapped up his press conference on a light-hearted note, with a message to the Canadian athletes gearing up for the Paris Olympics.
“To our athletes in Paris, we wish them a great Olympics. We’re so proud of you. Go for the gold,” Macklem said.
Rate divergence with U.S. ‘not going to be particularly serious’: Macklem
Macklem acknowledged the widening gap between the BoC’s rate and that of the Federal Reserve, but suggested there was still ample wiggle room and little reason for concern.
“Yes, there are limits to how far Canadian and U.S. rates diverge,” he said. “We’re still not close to that limit, and with inflation showing more signs of easing in the United States, my sense is that that divergence is not going to be particularly serious.”
Rate cuts aren’t ‘the magic solution’ for housing crisis: Rogers
Lowering interest rates as conditions allow “will have some effect that will help on housing,” said senior deputy governor Carolyn Rogers, but “it isn’t the magic solution.”
“It would be a mistake to pin all of our hopes on our housing imbalance on interest rates,” she said. “Canadians need a more fulsome policy response than that.”
Macklem brushes off stagflation concerns
Asked whether “stickiness” of service inflation and wage growth are signs of stagflation — a prolonged period of slow growth, high unemployment and pesky inflation — Macklem was very direct.
“I don’t think 2.7 per cent inflation is what anybody would call stagflation,” he said. “I mean, look, we’re within our inflation band of one to three per cent. You know, the message is, we’ve made a lot of progress.”
More cuts ‘reasonable,’ but ‘we’re not on a predetermined path’: Macklem
Asked for projections on future cuts, BoC governor Tiff Macklem first noted that today’s cut was propelled by indicators showing “price pressures easing.”
The Bank will continue to watch those indicators, which it expects to show improvement, but not in “a straight line.”
“So now looking ahead, if inflation continues to evolve broadly in line with our forecast, it is reasonable to expect further cuts in our policy rate, but we’re not on a predetermined path. We’re going to be taking it one decision at a time.”
Interest rate cuts now BoC ‘default’: Manulife
Provided there are no “major surprises” in upcoming inflation data, Manulife Investment Management now expects interest rate cuts at “every remaining meeting this year” and a year-end overnight rate of 3.75 per cent.
“The central bank continues to forecast a recovery in the second half of 2024, but it implicitly tells us that additional cutting will be needed: indicators of growth are all soft,” wrote Dominique Lapointe, Manulife’s director of macro strategy.
“The ‘default’ now is to cut interest rates,” Lapointe wrote.
BoC language ‘opens the door’ to a September cut: CIBC
The tone of the BoC’s statement has CIBC reconsidering its expectation for a break in BoC cuts in September.
The statement includes mention of “inflation dropping too far alongside mentions of those areas that are still seeing price pressures,” and notes that an expected pickup in growth will come in part because of lower rates, writes Avery Shenfeld, CIBC Capital Markets chief economist, “so there is clearly an intention to continue to trim rates this year and in 2025.”
The statement “opens the door to a further cut in September,” Shenfeld writes, so CIBC may switch its projection for a pause in cuts to December, pending more clues in the upcoming press conference.
“This is clearly now a dovish central bank that is looking to ease up on rates and get the economy moving again,” wrote Shenfeld, “so a further 50 bps of easing this year, and our projection for a 2.75 per cent rate at the end of 2025, seem fully consistent with that stance.”
TSX dips after rate cut
The S&P/TSX Composite dropped following the BoC rate cut announcement, erasing a very slight early gain at the open of trading. As of 10:11 a.m., the index was at 22,739.34, down 0.33 per cent from yesterday’s close.
Key takeaways from Governor Macklem’s opening statement, coming at 10:30 a.m. ET
On economic growth:
“Economic growth in Canada has picked up but remains weak relative to population growth. Household spending has been soft. Pent-up demand for things like new cars and travel is fading. And many families are setting aside more of their income for debt payments, leaving less money for discretionary spending.”
On the labour market:
“Employment has continued to grow more slowly than the labour force. Job seekers are now taking longer to find work, and the unemployment rate has risen to 6.4 per cent… Overall, indicators suggest some slack in the labour market.”
On the opposing forces affecting inflation:
“The overall weakness in the economy is pulling inflation down. At the same time, price pressures in shelter and some other services are holding inflation up. We are increasingly confident that the ingredients to bring inflation back to target are in place. But the push-pull of these opposing forces means the decline in inflation will likely be gradual, and there could be setbacks along the way.”
On the risks to inflation:
“Globally, geopolitical uncertainty is high. Here in Canada, the biggest downside risk is that household spending could be weaker than expected. On the upside, inflation in shelter and other services could prove more persistent.”
On future cuts:
“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate. The timing will depend on how we see these opposing forces playing out. In other words, we will be taking our monetary policy decisions one at a time.”
