The Bank of Canada sounds dovish while cutting rates again, and signaling there’s more to come

KEY TAKEAWAYS

• Today the Bank of Canada cut its policy rate for the second straight time. The rate now sits to 4.5%. This move that was widely expected. Markets priced in a 89% chance of this rate cut before the announcement.
• Global growth unchanged, but U.S. weaker: The Bank’s outlook for the global economy is essentially unchanged, with roughly 3% annual growth expected over the projection. The forecast for U.S. real GDP growth in 2024 was lowered slightly (to 2.3% from 2.7%). Growth in Europe is weak but recovering (revised up to 0.7% from 0.4%). China continues to face slowing growth due to headwinds from its depressed property sector.
• Canada’s economy in excess supply: The Bank’s forecast for Canadian real GDP was revised down this year (to 1.2% from 1.5%). With weak economic growth relative to strong population growth, the Bank sees increased excess supply in Canada’s economy, which should restrain inflation pressures. Consumer spending per capita is soft, and slack in the labour market is growing, with the unemployment rate rising and people taking longer to finding jobs.
• More confidence in inflation returning to target: Given the weak economy, despite revising up its forecast for headline inflation next year (to 2.4% from 2.2%), the Bank is “increasingly confident that the ingredients to bring inflation back to target are in place”. In his press conference, the Governor added, “We need growth to hold up so inflation does not fall too much”. All told, downside risks are an increasing worry for Governing Council.
• Looking ahead: We expect at least two — and possibly three — more rate cuts this year. Markets are currently pricing in a 65% chance of another cut at the Bank’s next rate announcement on September 4. In the U.S., markets expect the Federal Reserve to deliver its first rate cut on September 18.

BANK OF CANADA PROJECTIONS