On Wednesday, the Bank of Canada announced a 0.25 percentage point reduction in its standard interest rate, bringing it down to 4.5%. This move focuses on developing the economy as Canada’s inflation percentage slows and economic indicators weaken. Economists widely predicted this decision.
According to Governor Tiff Macklem, further rate cuts might be necessary to maintain economic recovery and control inflation. He expressed that the current inflation rate in Canada will bring inflation down to the target level. “We are increasingly confident that the ingredients to bring inflation back to target are in place,” he added.
Macklem highlighted that future rate adjustments will be based on incoming economic data and their implications for the inflation rate in Canada. He did not commit to specific rate cuts at each of the remaining three meetings this year, citing possible risks that could push inflation higher. How rate cuts fit in to this strategy depends heavily on the evolving economic landscape. “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.
CIBC’s chief economist, Avery Shenfeld, noted that the central bank’s perspective suggests more rate cuts could happen soon, possibly in September and October, bringing the rate to 4.0%. BMO’s chief economist, Doug Porter, also expects two more cuts this year, contingent on inflation data and job market trends.
Besides, inflation is forecasted to average 2.4% in the fourth quarter of 2024, slightly higher than previous estimates but expected to hit the 2% target by 2025 and 2026.
Macklem said, possible reverses on the path to achieving the 2% inflation target. He mentioned that the cost of housing and increasing rents are causing inflation, but wage growth is starting to slow down. The Bank of Canada expects the economy to grow more slowly than expected in the first quarter. However, they predict that there will be a strong recovery in the third quarter, with the real GDP hoped to grow at an annualized rate of 2.8%, up from 1.5% in the second quarter.
The Bank of Canada wants to balance economic growth while ensuring inflation continues to decline. The direction of future rate cuts will depend on evolving economic conditions and data. During this economic transition in Canada, interest rates will be closely observed. There may be further cuts to help stabilize and grow the economy.
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