Bank of Canada with 50 bps rate cut
DECISION AND WHAT’S NEXT?
The BoC lowered its overnight policy rate by 50 bps to 3.75%. The move marks an acceleration in the pace of easing following three consecutive 25-bps cuts.
The decision to accelerate the pace of cuts was in response to easing inflationary pressures over the past few months.
Forward guidance was unchanged. Overall communications suggested that there is little appetite to follow up with another 50-bps cut, unless data continues to disappoint.
The monetary policy statement indicated that “the timing and pace of further reductions in the policy rate will be guided by incoming information and our assessment of its implications for the inflation outlook” and that the BoC will conduct monetary policy decisions “one meeting at a time”.
INFLATION IN FOCUS
The recent moderation in inflation appears to be the primary motivation for the outsized rate cut.
Governor Macklem left no room for uncertainty in the opening statement of his press conference indicating that “We took a bigger step today because inflation is now back to the 2% target and we want to keep it close to the target”.
The Governor elaborated by highlighting that “Price pressures are no longer broad-based, and both our measures of core inflation are now under 2.5%” and summarized by stating that “We are back to low inflation.”
The BoC lowered its forecast for inflation in 2024 (4Q on 4Q) but kept its forecast for 2025 unchanged at 2.0%. Looking ahead, a downside surprise relative to the updated forecasts could trigger a more aggressive pace of easing.
LOWER RATES EXPECTED TO BOOST ACTIVITY
Despite the stronger than expected employment report for September and improvement in the unemployment rate, the BoC continued to characterize the labour as “soft”.
The BoC also lowered its forecast for real GDP growth to 1.8% (prev. 2.0%) for 2024 (4Q on 4Q). This reflects a mark to market given recent softness in the data.
The 2025 forecast was, however, upgraded to +2.3% (prev. 2.1%) as activity is expected to strengthen, supported by lower interest rates.
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