Bank of Canada cuts key interest rate again, signals more ahead

The Bank of Canada delivered its third consecutive interest rate cut Wednesday, bringing its key lending rate to 4.25 per cent.

The quarter percentage point rate cut was widely expected by forecasters, given ongoing softness in the economy and easing inflation.

In his written remarks, governor Tiff Macklem said the central bank’s decision reflected two considerations.

“First, headline and core inflation have continued to ease as expected,” Macklem said.

“Second, as inflation gets closer to target, we want to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the two per cent target.”

The Bank of Canada noted that while the economy grew at a faster pace than expected in the second quarter, preliminary data for June and July suggest economic activity slowed.

“It’s said that victory goes to the bold, but the Bank of Canada went with the more cautious approach of yet another quarter point rate cut, leaving rates still well above where they will have to head to get the economy really moving again now that inflation is less of a threat,” wrote CIBC chief economist Avery Shenfeld.

Shenfeld noted that financial markets had placed small odds on a half-percentage-point cut, but the central bank opted to take a balanced approach.

Macklem reiterated that if inflation continues to ease as expected, it is “reasonable” to expect more rate cuts.

Canada’s annual inflation rate has been below three per cent for months, reaching 2.5 per cent in July.

With the central bank’s target inflation rate in sight, Macklem has been stressing the importance of balancing the upside and downside risks ahead.

“There is a risk that the upward forces on inflation could be stronger than expected,” Macklem 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.”

By Nojoud Al Mallees