Canadian rates cut by 25 bps to 4.25%

Chhad Aul, Chief Investment Officer and Head of Multi-Asset Solutions, SLGI Asset Management Inc.

• Recent data prints have provided the comfort for the Bank of Canda (BoC) for a 25 basis points (bps) cut in September.? We also think it’s highly likely that it will cut 25 bps in each of the final two BoC meetings in 2024.?
• Current interest rates are meaningfully higher than inflation hence there is room for the BoC to continue normalizing rates.
• Canada’s Consumer Price Index (CPI) moderated as expected to 2.5% in July from 2.7% in June. Not only was this the slowest pace in more than three years, but the decline was also broad-based.
• Notably, shelter inflation declined from 6.2% to 5.7% due to lower mortgage servicing costs and electricity prices. Another pain point, food inflation, also further moderated to 2.7% in July, down significantly from 5% at the end of 2023.
• In its July Monetary Policy Report (MPR), the BoC noted that while it revised 2024 working age population growth up by 0.2% to 3.3%, GDP growth in Q1 2024 was 1% weaker than expected due to softer car exports and slower new construction activity. This meant GDP per person contracted for the fourth consecutive quarter.
• Q2 2024 GDP growth has been revised to 1.5%. Reflecting the cautious tone of recent Consumer Expectation Surveys, discretionary household spending is expected to decline as debt servicing costs and prices remain high.
• Restrictive monetary policy is having its intended effect on inflation as the Canadian economy has moved from inflationary excess demand to excess supply. Unemployment has climbed from 5% in 2022 to 6.4% in July 2024. Job vacancies, a leading indicator, has declined to pre-pandemic levels.

Source: Bank of Canada, Macrobond

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