The Bank of Canada delivered a second consecutive rate cut this morning, and language in the accompanying communications suggested that further easing could come in the months ahead, triggering a mild sell-off in the loonie.

In the official statement setting out the decision, policymakers noted that progress in reducing inflation has continued, with the Bank’s preferred measures of core inflation holding below 3 percent for several months and diffusion measures nearing historical norms. Shelter price growth remains elevated, and services costs continue to rise in the areas most affected by rising wages. Overall, the Bank expects core inflation to slow to a 2.5-percent annualised pace in the second half before easing to 2.4 percent in 2025.

In prepared comments released ahead of the post-decision press conference, Governor Macklem said “Looking ahead, we expect inflation to moderate further, though progress over the next year will likely be uneven”. “If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate. 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”.

On the growth outlook, officials observed that population growth continues to outpace gross domestic product, widening the output gap and contributing to a state of excess supply in the economy. “Household spending, including both consumer purchases and housing, has been weak,” and “There are signs of slack in the labour market”. Updated projections in the Monetary Policy Report showed the Bank’s economists expect growth to hit 1.2 percent in 2024 – down from the previous 1.5-percent estimate – and 2.1 percent in 2025, as household spending and business investment recovers and exports play a more meaningful role. Although “the anticipated economic slowdown is materialising, with consumption growth moderating,” in the United States, the global economy is still seen expanding at an annual rate of 3 percent through the end of 2026, providing a supportive external demand backdrop.

Odds on another rate cut at the September meeting are climbing relative to pre-release levels, and rate differentials are widening across the front end of the yield curve. The Canadian dollar is slipping against the greenback as we go to print, unwinding gains achieved earlier in the morning.

Short-term Treasury yields slumped and the US dollar lost altitude after the open this morning when Bill Dudley, former president of the New York Federal Reserve, penned a Bloomberg article saying “the facts have changed, so I’ve changed my mind. The Fed should cut, preferably at next week’s policymaking meeting”. According to Dudley, inflation has abated and growth is slowing, putting upward pressure on unemployment rates, with potential knock-on consequences for consumer spending. He says “Although it might already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk”. Odds extracted from Fed Fund futures on a move next week have more than doubled to 6.5 percent from the 2.5 percent implied before the article’s release.