Morning Market Brief: July 25, 2024

Another rate cut from the BoC?

At a second straight meeting, the Bank of Canada (BoC) lowered its policy interest rate. As inflation has come down, economic conditions have weakened, prompting another rate cut from Canada’s central bank. Given downside risks to Canada’s economy, there could be more rate cuts this year.?

• The BoC lowered its benchmark overnight interest rate by 25 basis points (bps) from 4.75% to 4.50%. This marked the second consecutive rate cut of 25 bps from the BoC, in a move widely expected by economists, based on a survey by Bloomberg.
• Canada’s central bank sees many risks to the outlook for Canada’s economy. Economic growth has moderated, while labour market conditions are showing signs of slowing. The BoC believed the rate cut was warranted to help avoid a potential hard landing. The BoC thinks this rate cut, along with the first one, could help stabilize economic conditions.
• The BoC sees inflation coming down and reaching its 2% target. Inflation has declined, helping to drive yesterday’s rate cut. In its outlook, the BoC sees inflation reaching its 2% target in 2025. Two key drivers of inflation, mortgage costs and shelter, might see prices subside with the rate cut, according to the BoC.
• BoC Governor Tiff Macklem offered there could be more rate cuts. However, he stopped short of providing a definitive timeline. Rather, it will be determined by prevailing data at each upcoming meeting.

The BoC has begun its phase of loosening monetary policy, but the pace could be gradual as it navigates through still elevated inflation and modest economic conditions. Still, more rate cuts this year seem possible. As the divergence between Canadian and US interest rates widens, it could put downward pressure on the Canadian dollar. The US Federal Reserve Board makes its next interest-rate decision on July 31.

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