The Bank of Canada Lowers Interest Rates for the Second Consecutive Month

The Bank of Canada has reduced its key interest rate by 25 basis points for the second month in a row, bringing it down to 4.5 percent. The bank indicated that further cuts could be possible if inflation continues to decrease in line with forecasts. The interest rate cut was announced on Wednesday.

Previously, the Bank had maintained the interest rate at a two-decade high of 5 percent for nearly a year in an attempt to combat high inflation by curbing economic growth. “We are increasingly convinced that the ingredients to bring inflation back to target are present,” Governor Tiff Macklem told reporters. The bank reiterated that inflation should sustainably return to its target of 2 percent in the second half of 2025.

The Bank also downgraded its growth forecast for 2024 to 1.2 percent from the 1.5 percent it predicted in April, partly because households are saving more money to pay off debt, leaving them with less to spend on discretionary items.

The Canadian dollar weakened further following the interest rate cut, with the loonie trading down 0.06 percent to 1.3794 against the US dollar, or 72.5 US cents.

Money markets are anticipating a 52 percent chance of a further cut in the Bank’s next monetary policy announcement scheduled for September 4, forecasting only one additional cut of 25 basis points later this year, which would reduce the rate to 4.25 percent. “We need growth to increase so that inflation does not fall too much,” Macklem stated. He added that downward risks for inflation are becoming more significant in monetary policy considerations.

Inflation faces two opposing forces: a weak economy that pulls it down, and persistently high prices for housing and services that keep it elevated. “The risk of inflation coming in higher than expected must be balanced against the risk that the economy and inflation may be weaker than anticipated,” Macklem explained.

Consumer prices were reported to slow to 2.7 percent in June, while the bank’s closely monitored core inflation target also saw a slight decline. However, these data followed an unexpected increase in May.

In its quarterly Monetary Policy Report (MPR) released on Wednesday, the bank projected that overall inflation this year would be 2.6 percent and at 2.4 percent next year. Growth in the first quarter was only 1.7 percent, well below the bank’s April forecast of 2.8 percent.

The Bank stated that growth is expected to pick up in the second half, driven by stronger exports and a recovery in household spending as borrowing costs decrease. “With a strengthened economy, excess supply will be absorbed next year and into 2026,” Macklem noted. The Bank also projected that expected growth would be 2.1 percent in 2025, revised down from 2.2 percent in April, and 2.6 percent in 2026.