As had been widely expected, the Bank of Canada delivered a third consecutive rate cut this morning, and language in the accompanying communications helped prepare the ground for further easing in the coming months – but officials stopped short of pulling the fire alarm, suggesting that cuts will proceed at a gradual pace.
In the official statement setting out the decision, policymakers acknowledged a continued easing in price pressures, with the Bank’s preferred measures of core inflation slowing further, and shelter cost increases beginning to decelerate. Overall, “excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up”.
In prepared comments released ahead of the post-decision press conference, Governor Macklem reiterated language used in previous appearances, saying “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate. We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time”.
But the Governor was surprisingly neutral on the growth outlook, observing that the second quarter expansion marked a “healthy rebound from the near-zero growth we had in the second half of 2023,” and saying “Our July projection has growth strengthening further in the second half of this year. Recent indicators suggest there is some downside risk to this pickup. In particular, preliminary indicators suggest that economic activity was soft through June and July”.
Job market risks were given relatively short shrift in the statement itself. Macklem said “employment growth has stalled in recent months,” yet noted that the rise in the unemployment rate has been “concentrated in youth and newcomers to Canada, who are finding it more difficult to get a job”. “Slack in the labour market is expected to slow wage growth, which remains elevated relative to productivity”.
Odds on rate cuts at the Bank’s October and December meetings are holding firm at pre-release levels, but rate differentials are tightening at deeper time horizons, suggesting that market participants expect Canadian policymakers to lag their US counterparts in easing policy later next year. Although directional moves could be unwound in the coming minutes as the US Job Openings and Labor Turnover survey shifts market expectations ahead of Friday’s non-farm payrolls report, the Canadian dollar is rising against the greenback as we go to print, and we would suggest that risks are biased to the upside after Friday’s event risk has passed.