Morning Market Brief September 20, 2024

BoC concerned about inflation falling too far

While the US Federal Reserve Board made its interest-rate decision on Wednesday, the Bank of Canada (BoC) released the Summary of Deliberations from its meeting on September 4. At that time, the BoC reduced its benchmark overnight interest rate by another 25 basis points, its third consecutive rate cut. However, the BoC began getting concerned that it might overshoot its 2% inflation target.

• The Summary of Deliberations showed BoC officials believed a rate cut was warranted, with inflation coming down, muted economic growth and a downgrade in labour market conditions. The BoC’s benchmark overnight interest rate now stands at 4.25%.
• Concern is growing among officials that inflation might fall well below the bank’s 2% target. High interest rates have helped bring down inflation over the past couple of years. Now, the risk of overshooting the BoC’s target is present. If this turns out to be correct, the BoC could need to take rates to even lower levels to help stimulate economic conditions.
• Looking ahead, the BoC noted that future interest-rate decisions will be made based on the economic data at that time. While it might take a gradual approach to lowering interest rates, the BoC said it could speed up interest-rate cuts depending on the progress of inflation, the economy and the labour market.
• After a busy Wednesday, the Bank of England (BoE) came into the spotlight yesterday. The BoE held its key interest rate steady at 5.00%, but it signalled a strong likelihood of more rate cuts in the months to come.

Despite concerns about inflation potentially falling too far, the BoC seems poised to keep lowering interest rates this year and into next. Prevailing economic conditions in Canada are relatively soft. Some support from the BoC is likely warranted. Lower rates should help support increased spending and higher activity in Canada’s real estate market.

At?CIBC Private Wealth, we aim to take a comprehensive approach to managing, building and protecting your wealth. If you'd like to discuss this market and economic update in more detail, please get in touch with your advisor anytime.