Earlier today, the Bank of Canada (BoC) reduced its Overnight Rate by 25 basis points for a second consecutive meeting, as widely expected by markets and economists amid easing inflationary pressures and a slowing economy. This brings the Overnight Rate to 4.50% and immediately directed the Canadian dollar (CAD) southbound versus its major peers, with short-dated bonds rallying (yields lower).

The central bank signalled that further reductions in the Overnight Rate are on the table. However, it will continue to make decisions on a meeting-by-meeting basis and will be guided by incoming data.

In prepared remarks, BoC Governor Tiff Macklem said the central bank needs ‘growth to pick up so inflation does not fall too much’.

Macklem noted that the central bank is ‘increasingly confident that the ingredients to bring inflation back to target are in place’. However, he also said that with the inflation target in sight ‘and more excess supply in the economy, downside risks are taking on increased weight in our monetary policy deliberations’.

On inflation, the BoC Governor further added that although the central bank expects inflation to continue slowing, ‘progress over the next year will likely be uneven’ and setbacks could be seen.

Monetary Policy Report

In the latest economic projections provided by the BoC, the central bank trimmed growth forecasts and expects inflation to hit the +2.0% midpoint of its target range by 2026.

On the CPI (Consumer Price Index) inflation front, the central bank expects inflation to rise +2.6% in 2024, unchanged from the previous forecast. Inflation is expected to gradually slow to +2.0% as we step into 2026 (revised lower from +2.1%).

Annual GDP (Gross Domestic Product) growth is forecast to be +1.2% in 2024, revised lower from +1.5%, +2.1% in 2025 (previous: +2.2%) and +2.4% in 2026 (previous: +1.9%).

Press Conference

Following the prepared remarks, the BoC Governor reiterated that ‘broad-based price pressures are easing and the ingredients are now in place to bring inflation to the +2.0% target’. Macklem added that ‘if inflation continues to evolve broadly in line with our forecasts, it is reasonable to expect further cuts’, though he cautioned there is no pre-defined path for future rates and it is ‘one decision at a time’.

Further comments from the press conference:

• BoC’s Macklem: ‘There was a clear consensus to reduce the Overnight Rate’.

• BoC Senior Deputy Governor Carolyn Rogers: ‘We don’t think we’re at a normalised state on our balance sheet yet’.

• BoC Macklem: ‘Divergence on rates with the US Federal Reserve is not going to be particularly serious’.

• BoC Macklem: ‘Monetary policy is still restrictive’.

• BoC Macklem: ‘We’re not on a pre-determined path’.

• BoC Macklem: ‘We don’t want to weaken the economy too much and have inflation below our +2.0% target’.

On balance, today’s update shows that the BoC emphasises that further easing is possible should inflation continue to ease.

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