The Bank of Canada (BoC) cut its key policy rate by 25 basis points to 4.25 percent and Governor Tiff McClam cited weak growth and said a bigger cut could be made if the economy needs a boost.
The bank kept its benchmark rate at a two-decade high of 5 percent for the one year to June as it began an easing cycle.
Wednesday marked the third consecutive cut, with the Bank continuing to ease broad inflationary pressures.
Headline inflation fell to a 40-month low of 2.5 percent in July, still above the BoC’s 2 percent target. But the economy now appears weaker than the bank predicted just six weeks ago.
“With inflation moving closer to the target, we need to be increasingly wary of the risk that the economy is too weak and inflation falls too far,” McCallum said.
Second-quarter growth was a better-than-expected 2.1 percent, but it flattened in June and is likely to be anemic in July. Economists say growth could fall short of the 2.8 percent annualized third-quarter advance the Bank had forecast in July.
McClam echoed his comments at a press conference, saying that while he expects growth in the second half of the year, there may be some risks to the projections.
A weakening economy has hurt the country’s ability to absorb a rapidly growing workforce, leading to rising unemployment, prompting continued calls for rate cuts.
Some economists are predicting that the slow-growing bank could move for a jumbo cut of 50 basis points (bps) in October or December. Macklem said larger cuts are possible if the economy weakens more than expected.
“We will evaluate the data as it comes out, and [if] We need to take a big step, we are ready to take a big step,” he said.
Financial markets see a 93 percent chance of a rate cut of 25 bps in October while a rate cut in December is fully priced.
Royce Mendes, head of macro strategy at Desjardins Group, said, “With growth easing rather than as officials had predicted in July, the risk is that central bankers will have to cut rates by 50bps instead of 25bps to trigger a recovery in October.” , wrote in a note.
A weakening economy
Since July, the six-member Governing Council has shifted its focus from simply controlling inflation to supporting the economy, even as it battles resilient inflation in some pockets.
“The overall weakness in the economy continues to drag down inflation,” McClam said, adding that stubbornly high prices in shelters and some services are holding back inflation.
If inflation continues to ease broadly in line with the bank’s July forecast, it is reasonable to expect more rate cuts, he said.
The BoC will announce its next decision on October 23 and also update its economic projections.
The last time the bank cut rates on three consecutive scheduled announcement dates was in 2009 during the global financial crisis.
The BoC became the first Group of Seven (G7) central bank to initiate a rate cut.
The European Central Bank cut rates in June, but they have been steady since then. It is expected to drop drastically this month.
Markets are pricing in the first rate cut by the United States Federal Reserve this month.
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