three in a row, with more to go

As was widely expected, the Bank of Canada opted to reduce its policy rate today by 25 basis points, at a third consecutive meeting, to 4.25%. The Bank’s trend-setting rate—while still elevated—now sits at its lowest point since December 2022. In its statement, the Bank noted that “Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up”. Increases in shelter prices are primarily being driven by mortgage interest costs and rent, both of which are more expensive because of high interest rates.

Today’s cut is another important step along the path back to a theoretical “neutral” range for the Bank of Canada—one they estimate to be between 2.25%-3.25%—with more steps to come later this year and into 2025.

The Bank will continue to lower its policy rate as long as inflation continues on its current path. The Canadian economy has increasingly struggled under the weight of high interest rates, with fewer people working and fewer job openings, while an overall decline in retail spending against the backdrop of high population growth will likely continue to keep consumer prices in check.

With this in mind, we expect inflation to have moderated further in August (we’ll know for sure when the data is released on September 17th), though there is some potential for inflation turbulence later this year due to base-year effects. The Bank of Canada’s next rate announcement is scheduled for October 23rd, where it will have the benefit of two more data releases from the Consumer Price Index, the Labour Force Survey, and myriad others on which to base its decision. Expect the data to point to the need for another cut and for the Bank to oblige.