two steps forward, no steps back

The Bank of Canada chose to lower its policy rate today, its second consecutive 25-basis-point reduction, to 4.5%. The Bank noted in its statement that its “preferred measures of core inflation are expected to slow to about 2.5% in the second half of 2024 and ease gradually through 2025. The Bank expects CPI inflation to come down below core inflation in the second half of this year, largely because of base year effects on gasoline prices. As those effects wear off, CPI inflation may edge up again before settling around the 2% target next year.”

While today’s cut is welcome news, a 4.5% policy rate remains restrictive; as such, we continue to expect more cuts in the months ahead. Ultimately, the Bank is looking to return its policy rate to a theoretical “neutral” range of 2.25%-3.25%, and will continue to move towards that goal as long as inflation remains on track to return to 2%. And on track it appears to be.

Inflation not only slowed in June, but prices actually fell month-over-month, with a continued slowdown in inflation over the next two months being highly likely due to base-year effects. Additionally, the labour market has continued to weaken, with rising unemployment and slowing wage growth, while retail spending has declined this year (and has dropped by 3% on a per-person basis).

We expect more rate cuts before the end of the year—two more, to be exact. The next announcements are on September 4th and October 23rd, when we expect the Bank to take at least one more step forward on their path to lower rates.