The Bank of Canada cut its benchmark interest rate by an outsized 50 basis points this morning, broadly matching market expectations and triggering a small drop in the loonie. In the official statement setting out the decision, policymakers acknowledged a broad-based slowdown in Canada, noting that consumption is declining on a per-capita basis, the labour market is “soft”, and the “economy continues to be in excess supply”.

Near-term growth expectations were revised down. Updated projections in the accompanying Monetary Policy Report showed the Bank’s economists expect growth to end 2024 at 1.8 percent – down from the previous 2-percent estimate.

But the Bank sees a recovery occurring over the next two years, with lower interest rates helping boost consumer demand even as population growth slows. “Residential investment growth is also projected to rise as strong demand for housing lifts sales and spending on renovations”.

External conditions are seen remaining stable. According to the statement, “Growth in the United States is now expected to be stronger than previously forecast while the outlook for China remains subdued. Growth in the euro area has been soft but should recover modestly next year”.

Against this backdrop, “Business investment is expected to strengthen as demand picks up, and exports should remain strong, supported by robust demand from the United States”.

Inflation risks are expected to subside more slowly. An average of the Bank’s preferred measures of year-over-year core inflation is now projected to hit 2.3 percent in the fourth quarter of this year – down from 2.4 percent previously – and 2.1 percent in 2025, slightly faster than the previous 2.0-percent estimate. Overall, “The Bank expects inflation to remain close to the target over the projection horizon, with the upward and downward pressures on inflation roughly balancing out. The upward pressure from shelter and other services gradually diminishes, and the downward pressure on inflation recedes as excess supply in the economy is absorbed”.

“With inflation now back around the 2 percent target,” the statement said, “Governing Council decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to the middle of the 1 percent to 3 percent range”.

Odds on another jumbo-sized move at the Bank’s December meeting are slightly higher relative to pre-release levels, suggesting that market participants still expect Canadian policymakers to move more aggressively than their US counterparts in the months ahead. The Canadian dollar is falling against the greenback as we go to print, but the move looks well-contained thus far – amounting to less than 10 basis points – likely reflecting a well-positioned market backdrop and a relative lack of extreme pessimism in the Bank’s communications.

We think the currency could remain under sustained pressure into early November’s election, but a recovery could be in the offing once lower rate expectations become more fully embedded in Canadian consumer psychology, meaning that an eventual push back through the 1.35 threshold cannot be ruled out.