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Going Down: Bank of Canada cuts rate to kick off the easing cycle in the G7
Today the Bank of Canada shifted its policy stance, and kicked off the easing cycle among G7 countries, by cutting its overnight rate from 5% to 4.75%.
Andrew DiCapua
Today the Bank of Canada shifted its policy stance and kicked off the easing cycle among G7 countries by cutting its overnight rate from 5% to 4.75%. This move was the right call and was expected, as financial markets had priced in an 80% chance of a cut.
Recent data have confirmed that high interest rates have slowed momentum in underlying inflation —aside from shelter costs —, and have given the supply side of Canada’s economy enough time to catch up to demand. The economy has also revealed its weak fundamentals, including poor productivity and falling real GDP per capita during a population surge. The Bank continues to view the economy as operating below its potential now, and they must be forward-looking in setting policy. The sharp slowdown expected in temporary immigration over the coming year could be a notable drag on headline growth.
Inflation on an annual basis has fallen back into the Bank’s inflation control band for the first four months of the year, recently undershooting the Bank’s forecasts. Core inflation has also improved significantly in the last two months. Wage pressures are elevated but appear to be moderating. Corporate pricing behaviour continues to normalize, even if it isn’t yet back to normal. Inflation expectations are still higher than the Bank would like, but are moving in the right direction.
All told, the Bank has now seen enough progress in the fight against inflation to offer some modest — but much needed — interest rate relief for Canadian consumers and businesses. With the benefit of hindsight, we can now say that the Bank waited a little too long to start raising rates. Today they moved decisively, avoiding excessive caution and the mistake of waiting too long to ease policy. A “soft landing” remains in sight. There will be more rate cuts to come, with markets already pricing in another cut by September, and the policy rate set to end the year at 4.25%.
South of the border, the strong U.S. economy has kept inflation sticky and will have the Federal Reserve on hold for longer — it currently looks like the Fed’s first rate cut will be in November. The emerging Canada-U.S. interest rate differential should put downward pressure on the Canadian dollar. We will watch closely to see if it falls below 70 cents. While a weaker dollar helps our exports, it also makes imports more expensive, adding inflationary pressure and making the Bank’s job harder.
Housing is another key area to watch. Despite the widespread affordability problems, it’s possible that this first rate cut will bring buyers back into the market, and cause shelter costs to stay high.
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