The Bank of Canada cut its policy interest rate for the third consecutive time on Wednesday and signalled that more cuts were ahead as concern about a weakening economic picture takes on greater importance in the bank’s risk assessment process.

The decision, which reduced the benchmark rate by 25 basis points to 4.25 per cent, marked the first time the central bank has cut three times in a row, barring the pandemic, since the height of the global financial crisis in the first quarter of 2009.

“If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate,” said Bank of Canada governor Tiff Macklem, in prepared remarks in Ottawa. “We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time.”

Those opposing forces include the risk of the economy weakening further. Canada’s gross domestic product beat the bank’s own forecast with 2.1 per cent growth in the second quarter, but GDP in June and an early estimate for July were flat. The unemployment rate has climbed to 6.4 per cent and hiring remains soft.

“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,” Macklem said.

In July, Macklem highlighted the growing risk that inflation could fall below the two per cent target and reiterated that concern during Wednesday’s announcement.

Headline inflation slowed to 2.5 per cent in July and measures of core inflation, the preferred measures the bank looks at when making its policy decisions, have averaged around the same. The bank says shelter inflation, which is affected by higher interest rates, remains the largest contributor.

“Shelter inflation is still much too high, but it looks like it is starting to roll over, it’s starting to come down,” Macklem said. “To get back to the inflation target, we’re going to need to see some easing in shelter price inflation, so that is something we’re looking to continue.”

Claire Fan, economist with the Royal Bank of Canada, says despite the remaining factors that could keep inflation elevated, the central bank is increasingly focused on the risks of a weakening economy.

“Already, growth in the third quarter is looking to undershoot the Bank of Canada’s July forecast of 2.8 per cent,” said Fan, in a note to clients. “We continue to expect the Bank of Canada to follow with another rate cut in October.”

David Rosenberg, founder and president of Rosenberg Research, also said he expects interest rate relief will continue as the economic picture worsens.

“The Canadian economy is on a very shaky foundation, as absent the population boom, the economy would be contracting at a -2.4 per cent annual rate,” said Rosenberg, in a note to clients.

conomists are predicting the Bank of Canada will continue cutting its interest rate for the remainder of the year and into 2025, with the rate falling to between 2.25 and 3.25 per cent by the end of next year.

When asked whether a 50 basis point cut is under consideration by the Bank of Canada, Macklem did not rule out the possibility.

“We will be assessing the data as it comes out, if we need to take a bigger step, we’re prepared to take a bigger step,” Macklem said. “At this point, 25 basis points looked appropriate.”

Source: The Financial Post