Bank of Canada July Meeting

Christopher Bowlby - Jul 24, 2024

On Wednesday July 24th, the Bank of Canada cut its key interest rate by 25 basis points (bps) to 4.50%. This is the second consecutive rate cut following the 25 bps reduction in June.

On Wednesday July 24th, the Bank of Canada cut its key interest rate by 25 basis points (bps) to 4.50%. This is the second consecutive rate cut followin the 25 bps reduction in June. The Bank of Canada is now the second G10 central bank to cut rates twice, joining the Swiss National Bank. This July cut was widely expected by the market due to the backdrop of weakening Canadian GDP and softening inflation.

Source: Bloomberg

The tone of the Bank of Canada’s statement and Monetary Policy Report continued the theme of dovish commentary, with more discussion of downside risks to the economy, including a softening labor market. This was highlighted even more in Governor Macklem’s prepared remarks:

 

"With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations. We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2% target.

 

We are carefully assessing the downward pull on inflation from ongoing excess supply, and the pressures from shelter and other services that are holding inflation up. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook.

 

If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate. The timing will depend on how we see these opposing forces playing out. In other words, we will be taking our monetary policy decisions one at a time."

 

Looking at the Monetary Policy Report, we saw a downward revision to 2024 GDP to 1.2%, with GDP expected to increase back to 2% in 2025 and 2.4% in 2026. The Bank of Canada also sees inflation continuing to move lower to 2.6% by the end of 2024 and settling at its long-range target of 2% in 2026.

The Bank of Canada noted in its statement that while inflationary pressures are easing, shelter and services inflation remain problematic. As we have discussed with previous BoC announcements, we continue to expect that the Bank will focus on Core and Supercore inflation statistics as a barometer of its success in fighting the underlying components of sticky inflation.

 

Finally, the Bank of Canada addressed the rising unemployment rate, which as of the last reading is at 6.4%. There has been a shift in tone by the Bank of Canada, where it now states that it is seeing slack in the labor market. With the job vacancy rate now back to normal, further softness in the job market will more directly show up as rising unemployment.

 

Overall, the Bank of Canada has kept the door wide open for additional cuts. If there continues to be softness across GDP, employment, and inflation, we expect that the BoC will continue cutting rates in September and probably once more in Q4, bringing the overnight lending rate to 4% by year-end.

 

In 2024, there has been a clear divide between the Canadian and US economies and, as such, the monetary policies of each central bank. With the Canadian economy slowing at a much greater rate than the US, we have seen inflation metrics normalize and labor market dynamics shift much faster. The Bank of Canada is now in a position to expedite rate cuts to help a slowing economy, whereas the Federal Reserve is still on the sidelines awaiting its first cut amid stubborn inflation and strong GDP.