Bank of Canada cuts rates for third time in a row, frets over weak growth

OTTAWA: The Bank of Canada on Wednesday cut its key policy rate by 25 basis points to 4.25% as forecast but expressed concern that weaker-than-expected growth might mean inflation falls too quickly.

The bank, citing inflation, had held its benchmark rate at a two-decade high of 5% for a year until June when it started the easing cycle.

Wednesday marked the third consecutive cut, with the bank citing continued easing in broad inflationary pressures.

Overall inflation fell to a 40-month low of 2.5% in July, still above the BoC’s target of 2.0%. But the economy now looks to be weaker than the bank had forecast just six weeks ago.

Bank of Canada: can’t cut rates until it sees more inflation progress

“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,” Macklem said in opening remarks ahead of a press conference. “We care as much about inflation being below the target as we do above.”

The bank had forecast third-quarter annualized growth of 2.8% in late July. Macklem said data for June and July growth meant that forecast was now at risk.

While high rates helped curb inflation, they also sapped economic growth by draining spending power.

Financial markets are betting that there is a 93% chance of a rate cut of 25 basis points in October and a rate reduction in December is fully priced in. Some economists are predicting that slow growth could prompt the bank to go for a jumbo cut of 50 basis points in October or December.

“With growth faltering instead of picking up as officials had forecast back in July, the risk is that central bankers will need to slash rates in October by 50bps instead of 25bps to spur a recovery,” Royce Mendes, head of macro strategy at Desjardins Group, wrote in a note.

Since July, the six-member governing council has pivoted from seeking only to control inflation to supporting the economy even as it fights resilient inflation in some pockets.

“Overall weakness in the economy continues to pull inflation down,” Macklem said, adding that stubbornly high price pressures in shelter and some services were holding inflation up.

Macklem said that if inflation continued to ease broadly in line with the bank’s July forecast, it was reasonable to expect further rate cuts.

The Canadian dollar pared early losses and was up 0.1% to 1.3538 against the U.S. dollar, or 73.87 U.S. cents, while yields for two-year Canadian government bonds fell 5.2 basis points to 3.193% after the release of the decision.

The BoC will announce its next decision on Oct. 23 when it will also update its projections for inflation and GDP.

The last time the bank cut rates on three consecutive scheduled announcement dates was in 2009, during the global financial crisis.