With broad price pressures continuing to ease and inflation expected to move closer to its 2% target, the Bank of Canada (BoC) today reduced its target for the overnight rate by 25 basis points (bps) to 4.5%.

In its statement, the BoC noted that CPI inflation moderated to 2.7% in June after increasing in May. The Bank’s preferred measures of core inflation have been below 3% for several months and are expected to slow to about 2½% in the second half of 2024 and ease gradually through 2025.

 

It also noted that some important parts of the economy—notably shelter and some other services—are holding inflation up, but weak household spending, slack in the labour market and moderating wage growth tipped the scales in favour of a cut. The BoC remains resolute in its commitment to restoring price stability for Canadians and reaffirmed future monetary policy decisions will be guided by incoming information and implications for the future inflation outlook.

 

Today’s rate cut was widely expected. “Markets had priced in a very strong probability of a rate cut,” says Michael Keaveney, Vice President, Managed Solutions, CIBC Asset Management. “This expectation was driven by recent reports of weakness in Canadian retail sales, continued low business sentiment around future sales growth, and easing labour markets which may result in reduced wage growth pressures.”

 

Today’s announcement was accompanied by the quarterly Monetary Policy Report. The report indicated that inflation is no longer broad-based, and measures of core inflation have eased significantly.

 

“Domestic government bond prices rallied this morning across maturities, and the Canada 10-year government bond yield declined to 3.34% in the moments after the rate cut announcement,” says Mr. Keaveney. “The Canadian equity market was modestly down in early trading, but less than the day’s trend in other global equity markets, with advancers matching the number of decliners. Interest rate sensitive sectors such as utilities and real estate were positive, while financials were slightly lower to start the day.”

 

In other comments, BoC Governor Tiff Macklem indicated that should inflation continue to ease in line with forecasts, then it is reasonable to expect further rate cuts. The next BoC meeting and rate decision is scheduled for September 4, 2024.

 

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