Following Bank of Canada rate cut, Macklem says it’s “reasonable” to expect more

Posted On Jul 25, 2024

In addition to announcing the rate cut, the Bank of Canada also released updated economic forecasts, projecting moderately slower GDP growth in 2024 than previously anticipated.

The Bank of Canada delivered a widely anticipated rate cut this morning, and more can be expected, according to the Governor.

The quarter-point reduction brings the Bank’s overnight target rate to 4.50%, now 50 bps below its peak of 5.00%.

In his opening statement following the announcement, Governor Tiff Macklem hinted that more could be forthcoming as long as inflation continues to move in the right direction.

“If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate,” he said. “The timing will depend on how we see these opposing forces playing out. In other words, we will be taking our monetary policy decisions one at a time.”

While the Bank notes that price pressures are continuing to ease, it drew attention to “some important parts of the economy—notably shelter and some other services,” that are “holding inflation up.”

Today’s Highlights

• New benchmark rate: 4.50%
• Expected prime rate: 6.70%
• 5-yr bond yield: 3.27% (-2 bps)
• Updated GDP forecasts:
  • 1.2% in 2024 (vs. 1.5% previously)
  • 2.1% in 2025 (vs. 2.2)
  • 2.4% in 2026 (vs. 1.9%)
• Updated inflation forecasts:
  • 2.6% in 2024 (no change)
  • 2.4% in 2025 (vs. 2.2%)
  • 2.0% in 2026 (vs. 2.1%)

The June inflation report from Statistics Canada found that shelter costs grew at an annualized rate of 6.2%, though that’s down from 6.4% in May. Two key shelter components, rent prices and mortgage interest costs, continue to see elevated annual growth rates of 8.8% and 22.3%, respectively.

“The slew of recent weak data appears to have convinced the BoC that lower interest rates are warranted, and the Bank appears confident that inflation is on a sustainable track towards 2%,” noted Tony Stilo, Director of Canada Economics at Oxford Economics.

“What is important is today’s dovish pivot by the BoC,” he added. “This means rate cuts could be quicker than we previously anticipated.”

Updated economic forecasts

The Bank says it continues to expect headline inflation and its preferred measures of core inflation—which strip out volatile components—to continue moving closer to its target level of 2%.

Inflation expectations remain largely on track, according to the Bank’s latest forecasts included in today’s Monetary Policy Report. It continues to expect an average inflation rate of 2.6% for 2024, falling to 2.4% in 2025 (up from its previous forecast of 2.2%). The Bank then expects inflation to reach its 2% target in 2026.

The Bank of Canada lowered its economic growth projections for the coming years, now forecasting real GDP growth of 1.2% in 2024 (down from 1.5%), before picking up to 2.1% in 2025 and 2.4% in 2026.

“Economic growth is forecast to increase in the second half of 2024 and beyond as interest rates gradually ease and both household and business confidence rise,” the MPR reads.

Future rate cut expectations

While today’s rate easing is welcome news for borrowers with variable or adjustable rate loans, economists note that today’s rates continue to remain restrictive.

“A 4.50% policy rate that’s well north of inflation is still quite restrictive and, as such, the economy will still feel its pressure,” wrote TD economist Rishi Sondhi.

TD’s current forecast is for one final quarter-point rate cut to be delivered in the fourth quarter. The market remains uncertain about the timing, with three more Bank of Canada monetary policy meetings scheduled for September, October and December.

“The door is still open for additional cuts, and September is very much on the table if the next core CPI print behaves,” wrote Douglas Porter, chief economist at BMO, which is currently forecasting two more rate cuts in 2024.

“The tone of today’s many remarks almost seems to suggest that the Bank now needs to be convinced not to keep trimming rates,” he said. “We continue to look for two more rate cuts before the end of 2024, taking the overnight rate down to 4%, with the precise timing over the next three meetings driven by the incoming data.”

Porter isn’t the only one to have noticed the central bank’s growing haste to lower rates.

“There’s a strong sense that policymakers feel an urgency to continue to the rate cutting cycle in September,” wrote Randall Bartlett, senior director of Canadian Economics at Desjardins. “The dovish language in the releases paints a picture of officials who are growing more worried about the likelihood of recession.”

Source: 

Huebl, S. (2024, July 25). Following Bank of Canada Rate Cut, Macklem says it’s “reasonable” to expect more. Mortgage Rates & Mortgage Broker News in Canada. https://www.canadianmortgagetrends.com/2024/07/following-bank-of-canada-rate-cut-macklem-says-its-reasonable-to-expect-more/