Bank of Canada Cuts Interest Rate Again, Signals Slower Pace

The Bank of Canada signalled on Wednesday that it may adjust the pace of interest rate reductions if conditions change, after announcing a third straight quarter-point cut to its policy rate. Governor Tiff Macklem said the decision to reduce the key lending rate to 4.25% reflected continued progress in lowering inflation and the need to support a pickup in economic growth.

The 25-basis-point reduction had been widely anticipated by economists, given recent signs of softer activity and easing price pressures. In his opening remarks, Macklem emphasized that while the Bank remains on a path of gradual easing, it is prepared to modify that path if inflationary pressures or economic slack evolve differently than expected.

“If those upward forces in inflation proved to be stronger than we expected, or if there’s significantly less slack in the economy than we assess, yes, it might be appropriate to slow the pace of declines,” Macklem said. He added that the opposite could also be true: if the economy weakens more than anticipated and inflation falls faster, the Bank could take a larger step than 25 basis points.

Economic activity slowed in June and July

Although Canada’s economy posted stronger-than-expected growth in the second quarter, preliminary data signalled weaker activity in June and July. That uneven momentum contributed to the Bank’s cautious approach. CIBC chief economist Avery Shenfeld noted that financial markets had assigned only modest odds to a half-point cut, and that the Bank opted for a more measured, quarter-point move.

Shenfeld observed that the central bank’s decision keeps rates “well above where they will have to head to get the economy really moving again” while acknowledging that inflation is no longer the urgent threat it once was. Looking forward, Governor Macklem said that continued easing of inflation would make further reductions reasonable, and forecasters are generally expecting additional cuts at the Bank’s October and December meetings.

High interest rates over the past period have helped ease price pressures across the economy, and Canada’s annual inflation rate fell to 2.5% in July. Shelter costs remain a key contributor to headline inflation, but the recent rate cuts are already filtering through to lower mortgage interest costs for many households, which will influence spending and housing decisions over time.

Macklem stressed the importance of balancing upside and downside risks as inflation approaches the Bank’s 2% target. “There is a risk that the upward forces on inflation could be stronger than expected,” he said. “At the same time, with inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much.”

Inflation is approaching the Bank’s 2% target

TD Bank’s chief economist Beata Caranci described the quarter-point cut as an appropriate response to mixed economic signals. She argued that downside risks—namely the possibility that inflation weakens more than anticipated—are currently more concerning for policymakers than upside surprises.

There are signs of softening in the labour market and among consumers. Canada’s unemployment rate has risen over the past year and a half and reached 6.4% in July. Governor Macklem acknowledged the labour market slowdown during his news conference and noted that certain groups, including younger workers and recent immigrants, have been disproportionately affected.

With inflation nearing the Bank’s 2% objective and growth showing signs of fragility, the policy challenge is to support a sustainable recovery without allowing inflation to re-accelerate. That means the Bank will be closely watching incoming data on inflation, employment, consumer spending, and housing costs to determine the appropriate pace and size of any future rate moves.

The Bank of Canada’s next interest rate announcement is scheduled for October 23. Observers will be looking for guidance on the timing and magnitude of additional cuts and for how the central bank assesses the balance of risks facing the economy.

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